Chapter 14 Flashcards
Monopolistic competition
Market structure:
- Large number of firms compete
- Each firm produces a differentiated product
- Firms compete on product quality, price and marketing.
- Firms are free to enter and exit the industry.
Three implications of the large number of firms for the industry:
- Small Market Share
- Ignorance towards individual other firms
- Collusion is impossible
Collusion
When firms ‘in competition’ conspire to fix a higher price.
Product differentiation
The act of making a product that is slightly different from the products of competing firms.
Differentiated product
A product that is a close - but not perfect - substitute for the products of other firms.
Three areas of competition between firms:
- Product quality
- Price
- Marketing
Efficient Scale
The quantity at which average total cost is a minimum.
Excess capacity
If a firm produces less than its efficient scale.
Markup
The amount by which price exceeds marginal cost.
Resources are used efficiently when…
marginal social benefit equals marginal social cost.
Marginal social benefit of an innovation
The increase in price that consumers are willing to pay for the innovation.
Marginal social cost of an innovation
The amount that the firm must pay to make the innovation.
