Module 11 Study Guide Flashcards
What are the characteristics of monopolistic competition? Give your own example of a monopolistically competitive market.
Monopolistic competition has a large number of firms, they have differentiated products and compete on price, quality, and marketing, and there’s free entry and exit into the market. A common example are restaurants. Many of them but all different. Free entry and exit.
Product differentiation:
There are substitutes available but not perfect substitutes. Consumers will consequently not immediately switch products if price increases. This gives firms some price setting power. This makes demand downward sloping.
What is the difference between a monopoly and a monopolistically competitive firm?
The steps to find profit for a monopoly and a monopolistically competitive firm are very similar to calculate, but in monopolistic competition, other firms are able to enter the market.
What is the long-run economic profit for a monopolistically competitive firm? Explain.
0.
What is excess capacity?
Perfect competition long-run output will be the quantity where ATC is minimized. SO monopolistically competitive firms have excess capacity.
What is excess capacity?
Perfect competition long-run output will be the quantity where ATC is minimized. SO monopolistically competitive firms have excess capacity because they could produce more and lower their costs but they don’t because it’s not profit maximizing. Cost minimizing and profit maximizing are different things.
Why is advertising more important in monopolistic competition than in other market structures?
To differentiate the products in competition with one another. It shifts demands curve. Advertising is most important in the monopolistic competition market. It’ll shift demand curve and cost curve both.
A perfectly competitive firm has no reason to advertise because everybody knows that everyone’s products are all the same as each other’s.
Advertising can increase or decrease competition.
Because another company could see your advertising and intentionally advertise more than you if they have more money.
In monopolistic competition
Price is higher and quantity is lower than perfect competition.
