monopolistic competition Flashcards
What is monopolistic competition?
A market structure that is competitive but has some characteristics of monopoly.
List the key characteristics of monopolistic competition.
- Many buyers and sellers
- Slightly differentiated goods
- Firms are price makers
- Price elastic demand curves
- Low barriers to entry and exit
- Good information of market conditions
- Non-price competition
True or False: In monopolistic competition, firms can significantly raise their prices.
False
What type of competition exists in monopolistic competition?
Non-price competition based on branding, advertising, quality of product, and quality of service.
How do firms behave in monopolistic competition in the short run?
They profit maximize by producing where marginal revenue equals marginal cost.
What is the outcome for firms in monopolistic competition in the short run?
Firms can make supernormal profits.
What happens to supernormal profits in the long run in monopolistic competition?
They are eroded as new firms enter the market.
What diagram is used to illustrate firm behavior in monopolistic competition?
Monopoly diagram.
Define normal profit in the context of monopolistic competition.
When average revenue equals average cost in the long run.
What is the relationship between price and marginal cost in the long run for monopolistic competition?
Price is greater than marginal cost, leading to allocative inefficiency.
True or False: Monopolistic competition achieves productive efficiency.
False
What does dynamic efficiency refer to in monopolistic competition?
The ability of firms to reinvest profits back into the company.
What is a potential benefit of monopolistic competition over perfect competition?
Consumers may prefer differentiated goods over homogeneous goods.
Fill in the blank: In monopolistic competition, firms produce slightly _______ goods.
[differentiated]
What are some examples of markets that exhibit monopolistic competition?
- Clothing markets
- Taxis
- Fast food restaurants
- Hairdressers
- Bars and nightclubs
How does the entry of new firms affect existing firms in monopolistic competition?
It shifts the demand for individual firms to the left until normal profit is achieved.
What is the significance of good information of market conditions in monopolistic competition?
It allows firms to enter or exit the market easily.
What occurs when average revenue is greater than average cost?
Firms make supernormal profits.
What is the impact of consumer desire for variety on productive efficiency?
It may reduce the ability to exploit economies of scale.
True or False: Monopolistic competition is considered a highly efficient market structure.
False
What is a key factor that may allow for dynamic efficiency in monopolistic competition?
Short-run supernormal profits can be reinvested.
How do firms in monopolistic competition compare to monopolies regarding price exploitation?
Firms in monopolistic competition have less price-making ability.
