Monopolistic Competition Characteristics

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Questions and Answers

What are the 5 characteristics of monopolistic competition?

Relatively large number of firms

Differentiated products

Control over price

All of the above (correct)

How many firms are generally involved in monopolistic competition?

25-70 firms

What are the 4 ways firms differentiate products?

Product attributes

Service or conditions of sale

Brand names

All of the above (correct)

Give examples of product attributes.

Clothing, furniture, haircut Signup and view all the answers

What are examples of services or conditions of sale?

Credit, delivery, grocery Signup and view all the answers

What are examples of location and time differentiation?

Fast food, online shopping, 24-hour retail Signup and view all the answers

What are examples of brand names and packaging?

Aspirin, cosmetics, clothing Signup and view all the answers

Why does monopolistic competition have some control over price?

Control linked to product differentiation Signup and view all the answers

Why is there relatively easy entry and exit in monopolistic competition?

Small firms with few economies of scale Signup and view all the answers

What is the main barrier to entry for firms in monopolistic competition?

Develop/ differentiate/ advertise Signup and view all the answers

Why is heavy advertising necessary?

To inform and persuade consumers of product differentiation Signup and view all the answers

What is the goal of heavy advertising?

Make price less of a factor Signup and view all the answers

What happens to a firm's demand curve if non-price competition is successful?

Shifts to the right and becomes less elastic Signup and view all the answers

The demand curve faced by a monopolistic competition seller is inelastic.

False (B) Signup and view all the answers

Why is monopolistic competition more elastic than monopoly and less elastic than perfectly competitive markets?

Number of rivals and product differentiation Signup and view all the answers

What does price elasticity of demand faced by a monopolistic competition firm depend on?

Number of rivals and degree of product differentiation Signup and view all the answers

In the short run of monopolistic competition, a profit or loss is possible.

True (A) Signup and view all the answers

In the long run of monopolistic competition, only a normal profit is possible.

True (A) Signup and view all the answers

Why do firms enter the market in a short run profit situation?

Economic profit attracts new rivals Signup and view all the answers

What does the long run monopolistic competition graph look like?

Demand curve tangent to ATC at Q where MR=MC Signup and view all the answers

Why is the long run equilibrium for monopolistic competition break even?

No incentive for more firms to enter Signup and view all the answers

Prices in monopolistic competition are lower compared to perfect competition.

False (B) Signup and view all the answers

Why is monopolistic competition not economically efficient?

Firms not producing at minimum ATC Signup and view all the answers

What is excess capacity?

The gap between minimum ATC output and profit-max output Signup and view all the answers

Study Notes

Characteristics of Monopolistic Competition

Involves a relatively large number of firms (25-70), resulting in small market shares with independent actions and no collusion.
Products are differentiated through various means, allowing firms some control over price.
Entry and exit into the market are relatively easy for firms due to minimal capital requirements and few economies of scale.
Heavy advertising is essential to communicate product differentiation.

Product Differentiation

Products can be differentiated through attributes, service/conditions of sale, location and time, and brand names/packaging.
Examples of product attributes include clothing and healthcare, while service differentiation includes factors like delivery for groceries.
Location/time differentiation is seen in services like fast food and 24-hour retail options.
Brand name and packaging can include products like aspirin and cosmetics.

Price Control and Demand

Firms have some control over pricing due to product differentiation, as consumers are willing to pay more to satisfy particular preferences.
Pricing power is limited because of the abundance of substitutes.
The demand curve of a firm can become less elastic and shift to the right if advertising is effective.

Elasticity of Demand

The demand faced by a monopolistic competitor is highly elastic.
Elasticity is influenced by the number of rivals and the degree of product differentiation available in the market.
Compared to monopoly and perfect competition, monopolistic competition is more elastic than monopoly but less elastic than perfect competition.

Profits in Short Run vs. Long Run

In the short run, firms may achieve economic profits or losses.
In the long run, firms only earn a normal profit; profits attract competition, which leads to a leftward shift in demand for existing firms.
The long run equilibrium occurs when the demand curve is tangent to the average total cost (ATC) curve at the quantity where marginal revenue (MR) equals marginal cost (MC).

Economic Efficiency and Pricing

Prices are generally higher in monopolistic competition than in perfect competition.
Monopolistic competition is considered economically inefficient since firms do not produce at the minimum ATC, leading to excess capacity.
Excess capacity refers to the underutilization of resources whereby firms produce below their minimum efficient scale.

Market Dynamics

Heavy advertising is fundamental to differentiate products and reduce price sensitivity among consumers.
The entry of new firms in response to short-term profits ultimately results in reduced market share for existing competitors as demand decreases.

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Description

This quiz covers the key features of monopolistic competition, including the characteristics that define this market structure. It also explores how firms differentiate their products and the implications for pricing and advertising. Test your understanding of these concepts through flashcard-style questions.