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Questions and Answers
What is a characteristic of monopsonistic competition in terms of the number of buyers?
What is a characteristic of monopsonistic competition in terms of the number of buyers?
- There is only one buyer who determines the price
- There are many buyers, but each buyer has significant influence over price
- There are many buyers, and no individual buyer can influence price (correct)
- There are a few large buyers who can influence price
What is a result of supernormal profits in a monopsonistic market?
What is a result of supernormal profits in a monopsonistic market?
- New sellers are attracted to the market (correct)
- New sellers are deterred from entering the market
- The demand curve becomes more inelastic
- Existing firms will reduce their prices
What is the goal of firms in a monopsonistic market?
What is the goal of firms in a monopsonistic market?
- To increase their market share
- To maximize their profits (correct)
- To minimize their losses
- To set the lowest price in the market
What distinguishes the products supplied by different sellers in a monopsonistic market?
What distinguishes the products supplied by different sellers in a monopsonistic market?
What is the result of a firm successfully building brand loyalty and differentiating itself from rivals?
What is the result of a firm successfully building brand loyalty and differentiating itself from rivals?
What is the primary goal of advertising and branding strategies?
What is the primary goal of advertising and branding strategies?
What is the consequence of a flatter demand curve for a firm?
What is the consequence of a flatter demand curve for a firm?
What is a characteristic of a steep demand curve?
What is a characteristic of a steep demand curve?
What is the result of a firm's failure to differentiate itself from rivals?
What is the result of a firm's failure to differentiate itself from rivals?
What is a benefit to consumers in a monopsonistic market?
What is a benefit to consumers in a monopsonistic market?
What is a disadvantage of monopsonistic competition?
What is a disadvantage of monopsonistic competition?
Why do firms in a monopsonistic market have an incentive to innovate and differentiate their products?
Why do firms in a monopsonistic market have an incentive to innovate and differentiate their products?
What is a characteristic of firms in a monopsonistic market?
What is a characteristic of firms in a monopsonistic market?
What is a result of monopsonistic competition?
What is a result of monopsonistic competition?
Does product differentiation exist in a monopolistic market?
Does product differentiation exist in a monopolistic market?
Are their barriers to entry in an imperfect competition market?
Are their barriers to entry in an imperfect competition market?
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Study Notes
Monopolistic Competition
- No barriers to entry/exit for suppliers, allowing free market participation.
- Many buyers with no individual influence on price, ensuring a fair market.
- Multiple independent sellers set their own prices, subject to the Law of Demand.
- Price elasticity of demand is high due to close substitutes available in the market.
- Knowledge of profits is widespread among sellers, attracting new entrants in case of supernormal profits.
- Firms strive to maximize profits, driving business decisions.
- Product differentiation exists, with similar but non-identical products supplied by different sellers.
- Close substitutes are available, further intensifying market competition.
Demand Curve
- A steep demand curve (AR) occurs when a firm has successfully built brand loyalty and differentiated itself from rivals, resulting in loyal customers being less price sensitive.
- Steep demand curve means demand is relatively inelastic, giving the firm more power over price.
Factors Influencing Demand Curve
- A firm's ability to build brand loyalty affects the demand curve's steepness.
- Differentiation from rivals also influences the demand curve's steepness.
Flatter Demand Curve
- A flatter demand curve (AR) occurs when a firm has been less successful at building brand loyalty and differentiating itself from rivals.
- Flatter demand curve means demand is relatively elastic, giving the firm less power over price.
Advertising and Differentiation
- Firms use various strategies to differentiate their goods/services from competitors, including:
- Branding
- Competitive advertising
- Distinctive packaging
- Product quality
- Product innovation
- Loyalty cards
- Customer service
- Brand loyalty is the tendency of customers to continue buying a certain brand of a good rather than competing brands.
Advantages of Monopolistic Competition
- In a monopolistically competitive market, consumers have a wide choice of firms providing goods and services, such as numerous hairdressers.
- The market offers a wide variety of goods and services due to firms' incentives to innovate and differentiate themselves from others through creativity.
Disadvantages of Monopolistic Competition
- Individual firms do not produce at the minimum point on the Average Cost (AC) curve in the long run, resulting in inefficiency and wastefulness of resources due to excess capacity.
- Compared to a perfectly competitive market, prices are higher and output is lower in a monopolistically competitive market.
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