Monopolistic Competition Flashcards
1
Q
Define monopolistic competition and give 3 of its characteristics
A
A market structure that’s similar to monopoly and perfect competition
- Has many competitors
- Products are similar but not identical
- Free entry into and exit from the industry in the long run
2
Q
Give 3 forms of product differentiation
A
- Differentiation by style or type (sedans vs SUVs)
- Differentiation by location (dry cleaner near home vs cheaper one further away)
- Differentiation by quality (ordinary vs premium)
3
Q
What do new entrants into the market mean for original firms and how does this affect economic profits?
A
Fewer customers for original firms
Economic profits fall to zero - firms break even and new entry stops
4
Q
What do new exits in the market mean for remaining firms and how does this affect economic profits?
A
More customers for remaining firms
Economic profits fall to zero - forms break even and exits stop
5
Q
What happens to demand and MR with new entries/exits?
A
Entries - Demand and MR shift left
Exits - Demand and MR shift right
