Module 13.2: Monopolistic Competition Flashcards
What are the four characeristics of monopolistic competition?
1) Large number of independent sellers
2) Deifferentiated products
3) Firms compete on price, quality, and marketing
4) Low barriers to entry.
Are the demand curves for monopolistic competition downward sloping? Elastic>
Yes, they are downward sloping and are highly elastic because competing products are perceived by consumers as close substitutes.
When do firms in monopolistic competiton maximize profits in the short run?
producing where marginal revenue equals marginal cost and by charging the price for that quantity from the demand curve D.
Describe what happens in the long run for monopolistic competition?
Firms will enter the market and shift the demand curve faced by the firm down to the point where price equals average total cost, such that economic profit is zero. Firm will continue to produce at the quantity where MR = MC, but no longer earns positive economic profits.
Describe the differences in the long run between monopolistic and perfect competition?
price for goods in monopolistic competition will be higher when MR = MC.
describe product innovation? When is a firm described to be spending the perfect about on innovation?
necessary activity for firms in monopolistic competition to pursue economic profits. creates less-elastic demand curves, enabling them to increase price and earn economic profits.
Firms spend the right amount when marginal cost just equals the marginal revenue.
Describe advertising expenses for monopolistic competition compared to other forms of competition?
What does advertising costs do for supply and demand?
much greater than other forms of competition.
Increase the total cost curve for a firm initially, however if advertising leads to an increase in output, it can actually decrease a firm’s average total cost.
What is the significance of brand names?
Firms spend significant portion of advertising on brand name promotion.
