Monopolistic Competition Flashcards
What is monopolistic competition?
A form of imperfect competition with a downward sloping demand curve
How does monopolistic competition relate to perfect competition and monopoly?
It lies in between the two extremes of perfect competition and monopoly
Give examples of firms in monopolistic competition.
- Hairdressers
- Estate agents
- Restaurants
What is a key characteristic of monopolistic competition regarding buyers and sellers?
A large number of buyers and sellers, each relatively small and acting independently
What are the barriers to entry or exit in monopolistic competition?
There are no barriers, allowing new firms to enter and exit freely
What type of profits can firms make in the long run in monopolistic competition?
Only normal profits
How do firms in monopolistic competition differ from those in perfect competition?
Firms produce differentiated, non-homogenous goods or services
In the short run, what types of profits can firms in monopolistic competition achieve?
Supernormal profits, losses, or normal profits
At what point do firms produce in the short run for profit maximization?
At MC=MR1
What happens to demand for individual firms when new firms enter the industry?
Demand decreases, shifting AR and MR curves to the left
What is the long-run equilibrium condition for firms in monopolistic competition?
AC=AR and firms make normal profits
What limitations does the monopolistic competition model have?
Imperfect information may prevent firms from entering the market
Why might some firms maintain supernormal profits in monopolistic competition?
Differences in size, cost structure, and products
Are firms in monopolistic competition allocatively or productively efficient?
No, as MR does not equal AR
What is the relationship between MR and MC for profit-maximizing firms?
MR=MC
What is a potential for dynamic efficiency in monopolistic competition?
Innovative products can provide a competitive edge
What challenges might small firms face in monopolistic competition regarding investment?
Struggles to receive finance or retain profits for investment
How does the output and pricing in monopolistic competition compare to perfect competition?
Less is sold at a higher price
What benefits does monopolistic competition offer compared to perfect competition?
Greater variety and potential economies of scale
