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Flashcards in Monopolistic Competition Deck (12)
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monopolistic competition

market where there are many firms producing differentiating products in which there are no barriers to entry and exit


Monopolist competition assumptions:

  1. Number of firms
  2. Price control
  3. Barriers to entry and exit
  4. Product
  5. Dependence
  6. Short-run economic profit
  7. Long-run economic profit

  1. Many
  2. Some
  3. Some
  4. Differentiated
  5. Independent
  6. Possible
  7. None


How do firms product differentiate?

appearance, service, design, quality, expertise, location, branding


Examples of monopolistic competition

  • Nail salons
  • Car mechanics
  • Restaurants


How is a monopolistic competitive firm able to create market power?

create demand through product differentiation


What is the graph for monopolistic competition? Explain.

monopolistic competition demand curve not as steep as monopoly

  • more elastic so have less market power


Why can monopolies earn short-run economic profit?

monopolistic competition can set price


Why can monopolistic competition not make long-run economic profit?

no barriers to exit and entry - like perfect competition


price competition

firms compete on price by lowering it in hopes of increasing demand at expense of other firm


What is the excess capacity pattern in monopolistic competition?

greater differentiation = greater excess capacity


Monopolistic competition vs. perfect competition

  • no economic profit in long-run
  • no barriers to entry or exit
  • perfect competition more efficient
  • greater choice of product in monopolistic competition


Monopolistic competition vs. monopoly

  • monopoly earns long-run economic profit
  • monopoly has barriers to entry
  • neither is efficient
  • monopolistic competition has competitors
  • cost saving (economies of scale) more likely under monopoly (monopolistic competition firms not large enough)