Market Structures MCQ 2 (imperfect competition)

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.

Understand the characteristics and features of monpolistic competition, a market structure where many firms compete with each other, setting their own prices and quantities.