Chapter 16 - Monopolistic Competition Flashcards
Perfect Competition
Has many firms and identical products
Marginal cost = price in long run
Zero economic profit in the long run
Monopoly
Has one firm for one good or service (unique)
Market power is when the firm sets the price above marginal cost and this creates deadweight loss
Imperfect Competitions: Oligopoly
Few sellers of identical/similar products
Imperfect Competition: Monopolistic Competition
Many sellers with similar products but not identical
Concentration Ratio
Measures the dominance of a few firms in an industry
Strategic Interactions
Considering competitors actions when decision making
Product Differentiation
Selling products that are slightly different than your competitors
Free Entry or Exit
Firms can leave and enter markets without restrictions
Long term
In a busy market with many sellers, some make money, attracting more sellers. Some lose money, causing some to leave.
This back-and-forth continues until everyone finds a balance, and no one is making huge profits or losses.
Excess Capacity
A perfectly competitive firm will use all of its capacity to produce the most amount of a good at its efficient scale
A monopolistic competitive firm will not produce a good at its fullest capacity or at its efficient scale (it produces below it) but it has excess capacity then.
Product Variety Externality
Consumers get consumer surplus from the introduction of a new product, positive externality
Business Stealing Externality
With a new firm entering the market other businesses lose customers, negative externality
