Monopolistic Competition and Oligopoly

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  1. What is monopolistic competition?
    A market structure characterized

    1. many small sellers2. differentiated product3. easy entry and exit
  2. What are examples of monopolisticcompetition?
    •grocery stores•hair salons•gas stations•video rental stores•restaurants
  3. How many is many small sellers?
    •The many sellers condition is met when each firm is so small relative to the total market that its pricing decisions have a negligible effect on the market price
  4. What isproduct differentiation?
    •The process of creating real or apparent differences between goods and services
  5. What does easy entry and easyexit mean?
    •There are low barriers to entry, but entry is not quite as easy as in a perfectly competitive market because monopolistically competitive firms sell differentiated products.
  6. What is a barrier to entry inmonopolistic competition?
    •Firms can differentiate themselves from their competitors in ways other than price (nonprice competition).
  7. What is nonprice competition?
    •A firm competes using reputation, location, advertising, packaging, product development, and better service rather than lower prices
  8. Why is a monopolistic competitivefirm a price maker?
    •Product differentiation gives the firm some control over its price
  9. How does the elasticity of  demand curve for a monopolisticallycompetitive firm compare to a perfectly competitive firm and a monopolist?
    •It is less elastic (steeper) than for a perfectly competitive firm and more elastic (flatter) than for a monopolist
  10. What effect does advertising haveon average costs?
    •It raises the long-run average cost curve
  11. How does a firm decide what priceto charge and how many units to produce?
    MR = MC
  12. What happens in the long run wheneconomic profits are being made in the short run?
    •With easy entry, firms will enter the industry, and the demand curve for each firm shifts leftward because each firm’s market share declines.•The market price declines, and economic profits are eliminated.
  13. What happens to a firm’s costs inthe long run?
    •In addition to decreased demand from new entrants sharing the market, the cost curve for firms increases from increasing advertising and other expenses to compete against the new competition.
  14. New firms enter--> firm demand curve decreases-->firm increases advertising expenses--> firm's LRAC curve increases leads to what...
    Zero economic profit
  15. How does monopolistic competitioncompare to perfect competition in the long run?
    •Price is lower and quantity is greater in perfect competition compared to  monopolistic competition
  16. Why isprice higher and quantity lower in monopolistic competition compared to perfectcompetition?
    •Because firms in monopolistic competition face a downward sloping demand curve and a MR curve beneath it which is more steeply sloped
  17. How efficient is monopolisticcompetition?
    •Less resources are used and a higher price is charged than would be the case under perfect competition
  18. How efficient is monopolisticcompetition?
    •Less resources are used and a higher price is charged than would be the case under perfect competition
  19. What is oligopoly?
    Market  structure

    1. Few sellers2. Homogeneous or differentiated product3. Difficult entry

Card Set Information

Monopolistic Competition and Oligopoly
2013-10-26 03:02:57
Chapter 10

tucker 8ed
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