Monopolistic competition Flashcards
What is monopolistic competition?
Firms produce similar products, but present them to the public as very different from others. E.g. trainers, smartphones, cars.
What are the key characteristics of monopolistic competition?
Large number of firms: small market share, cannot influence price, ignore other firms, collusion is impossible.
Product differentiation: each firm produces a differentiated product; firms compete on quality, price, and marketing; firms are free to enter and exit the industry.
Downwards-sloping demand curve (caused by product differentiation).
Short-run equilibrium in monopolistic competition
Operates much like a single-price monopoly. Produces where MR=MC and sells for highest possible price. Economic profit (P>ATC) and economic loss (P
What occurs in the long-run in monopolistic competition?
Firms make zero economic profit and produce where P=ATC.
What causes excess capacity and mark-up in the long-run equilibrium?
The downwards-sloping demand curve.
What are the differences between perfect and monopolistic competition?
Firms in PC have no excess capacity and no mark-up.
Demand in PC is perfectly elastic, and the demand curve is horizontal.
MSB of an innovation is…
The increase in price that people are willing to pay for the innovation.
MSC of an innovation is…
The amount that the firm must pay for the innovation.
Profit is maximised when…
MR=MC
How can firms in monopolistic competition inform consumers and differentiate their product?
Heavy advertising.
What are selling costs?
Fixed costs such as advertising expenditures and retail buildings.
AFC decreases as…
production increases
When can a selling effort, such as advertising, be deemed successful?
If it increases demand for the product.
By increasing the quantity bought, advertising can…
Lower ATC.
Advertising increases cost but makes demand more elastic, which in turn…
Increases the quantity and lowers the price and mark-up.
