Chapter 16 Flashcards
Monopolistic competition
Monopolistic competition
A market structure with many firms selling similar but not identical products, characterized by free entry and exit.
Characteristics of monopolistic competition
- Many sellers, 2. Product differentiation, 3. Free entry and exit.
Product differentiation
A key feature of monopolistic competition; firms offer products that are similar but not perfect substitutes, allowing them some pricing power.
Demand curve in monopolistic competition
Downward sloping due to product differentiation, unlike the horizontal demand curve in perfect competition.
Profit maximization in the short run
A monopolistically competitive firm maximizes profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR), and pricing according to the demand curve.
Entry and exit in the long run
In the long run, free entry and exit drive economic profit to zero, leading to a price equal to average total cost (P = ATC).
Excess capacity
Monopolistically competitive firms operate below the efficient scale (where ATC is minimized) in the long run, resulting in underused resources.
Markup over marginal cost
In monopolistic competition, price exceeds marginal cost (P > MC) due to downward-sloping demand, unlike in perfect competition.
Role of advertising
Firms in monopolistic competition use advertising to differentiate their products and attract customers, increasing perceived value.
Pros and Cons of ads
Informs consumers, promotes competition, and can signal product quality
Can manipulate preferences, create unnecessary brand loyalty, and increase prices without improving quality.
Long run equilibrium in monopolistic competition
Firms produce at a quantity where P = ATC and earn zero economic profit, but P > MC, indicating inefficiency.
Monopolistic vs Perfect competition
In monopolistic competition, products are differentiated, and P > MC. In perfect competition, products are identical, and P = MC.
