Questions and Answers
What are the four characteristics of monopolistic competition?
Relatively large number of sellers, differentiated products, freed of entry and exit, and advertising is prevalent.
What is the market share characteristic of firms in monopolistic competition?
Each firm has a small market share, and no one firm dominates the market.
What are differentiated products in monopolistic competition?
Product attributes, physical or qualitative differences, brand names and packaging, service, and location.
What is the role of advertising in monopolistic competition?
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What happens to short run profits in monopolistic competition?
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What are short run losses in monopolistic competition?
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What occurs in the long run for firms in monopolistic competition?
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What does it mean when average cost runs along the demand curve in monopolistic competition?
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What must firms do to be successful in the long run in monopolistic competition?
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Are monopolistic competition firms efficient?
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What defines productive efficiency?
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What defines allocative efficiency?
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What is the gap between quantity in the long run and quantity that is productively efficient called?
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What are the characteristics of an oligopoly structure?
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How does the number of producers in an oligopoly compare to pure competition and monopoly?
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What does it mean when products in an oligopoly are differentiated or similar?
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What are the barriers to entry in an oligopoly?
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How do oligopolies control price?
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What does it mean that mergers are prevalent in oligopoly structures?
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What is game theory in the context of oligopoly?
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What is a payoff matrix?
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Study Notes
Monopolistic Competition
- Characterized by a relatively large number of sellers, differentiated products, freedom of entry and exit, and prevalent advertising.
- Each firm holds a small market share; no firm dominates, ensuring independence without collusion.
- Differentiation of products includes physical attributes, brand names, service, and location, enhancing competitive edge.
- Advertising plays a crucial role in making consumers aware of product differences, classified as non-price competition.
Short and Long Run in Monopolistic Competition
- Short run profits occur when demand and marginal revenue curves allow average costs to fall below demand.
- Short run losses arise when average costs exceed demand, indicating higher costs than prices.
- Long run adjustments lead to zero economic profits as firms enter the market to compete away excess rents.
- In the long run, the average cost aligns with the demand curve, reflecting normal profits.
- To sustain long-run success, firms must restart the short run by enhancing demand or reducing costs.
Efficiency in Monopolistic Competition
- Monopolistic competition is inherently inefficient; prices do not reach productive or allocative efficiency.
- Productive efficiency is achieved when marginal cost equals average cost.
- Allocative efficiency occurs when marginal cost aligns with the demand curve.
- The difference between long-run output and productive efficiency is termed excess capacity.
Oligopoly Structure
- Features few large producers, can offer either differentiated or similar products, and presents significant barriers to entry.
- Control over pricing exists, with firms being mutually interdependent, reacting to rivals’ pricing strategies.
- Mergers are common in oligopolies, driven by the desire to enhance market power.
Oligopoly Characteristics
- Few large producers result in fewer firms than pure competition but more than a monopoly.
- Products are often advertised to create differentiation, as seen with brand examples like Tampons.
- Barriers to entry in oligopolies resemble those in monopolistic markets.
- Firms act as price makers, carefully considering competitor reactions to changes in pricing or output.
Game Theory and Payoff Matrix
- Game theory emphasizes the strategic behavior of firms, considering rivals' actions in decision-making.
- Payoff matrix illustrates potential outcomes, showcasing profits based on high or low pricing strategies from competing firms.
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Test your knowledge on the characteristics of monopolistic competition and the distinctions of oligopoly with these flashcards. These concise definitions and concepts will help you understand key economic principles effectively.