question
monopolistic competition
answer
A market in which many firms produce similar goods and services but each maintains some independent control of its own price
lies between oligopoly and perfect competition
There are low entry barriers and low concentration ratios
lies between oligopoly and perfect competition
There are low entry barriers and low concentration ratios
question
Concentration Ratio
answer
The proportion of total industry output produced by the largest firms
monopolistic competition usually has a low concentration ratio
A few firms ma stand above the rest but the combined market share of the top 4 firms will be between 20 and 30 %
Starbucks has less than 15% in the Us coffee bar business and the top 4 have 28%
monopolistic competition usually has a low concentration ratio
A few firms ma stand above the rest but the combined market share of the top 4 firms will be between 20 and 30 %
Starbucks has less than 15% in the Us coffee bar business and the top 4 have 28%
question
Market Power
answer
The ability to alter the market price of a good or service
each producer in monopolistic competition has some market power (some control over price of a good)
A MONOPOLISTICALLY COMPETITIVE FIRM CONFRONTS A DOWNWARD SLOPING DEMAND CURVE FOR ITS OUTPUT
when starbucks increases coffee prices it loses customers, but not nearly as much as with a competitive firm
each producer in monopolistic competition has some market power (some control over price of a good)
A MONOPOLISTICALLY COMPETITIVE FIRM CONFRONTS A DOWNWARD SLOPING DEMAND CURVE FOR ITS OUTPUT
when starbucks increases coffee prices it loses customers, but not nearly as much as with a competitive firm
question
How will a modest change in output or price of any single firm influence the sales of another firm?
answer
Monopolistically competitive firm:
It will have no perceptible influence
Why? Because the effects of any one firms will spread over many other firms (rather than 2 or 3 in an oligopoly)
This is why they confront more traditional demand curves
It will have no perceptible influence
Why? Because the effects of any one firms will spread over many other firms (rather than 2 or 3 in an oligopoly)
This is why they confront more traditional demand curves
question
Barriers to Entry
answer
Obstacles such as patents that make it difficult or impossible for would-be producers to enter a particular market
Monopolistically competitive firms have low barriers to entry...these firms have downward sloping demand curves instead of horizontal ones (like in perfectly competitive firms) because their products are not quite viewed as interchangeable
brand image: like in bottled water industry
Monopolistically competitive firms have low barriers to entry...these firms have downward sloping demand curves instead of horizontal ones (like in perfectly competitive firms) because their products are not quite viewed as interchangeable
brand image: like in bottled water industry
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Product differentiation
answer
Feature that make one product appear different from competing products in the same market.
question
difference between monopolistically competitive firm and monopoly
answer
Both have downward facing demand curves
BUT
in monopolistic competition :each firm has a monopoly only on its brand image; it still competes with other firms offering close substitutes
BUT
in monopolistic competition :each firm has a monopoly only on its brand image; it still competes with other firms offering close substitutes
question
The more brand loyalty a firm can establish, the ____ likely consumers are to switch brands when PRICE is increased.
answer
LESS
Brand loyalty makes the demand curve facing the firm, less price elastic
Brand loyalty makes the demand curve facing the firm, less price elastic
question
Brand loyalty is high for
answer
gas, toothpaste, cigarettes
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Cross price elasticity
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the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
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Brand loyalty implies __________ cross price elasticity of demand.
answer
LOW consumers of those products say they'd stick to their accustomed brand even if the price of a competing brand dropped by 50%.
question
What is the short run equilibrium for a monopolistically competitive firm?
answer
MC=MR
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Production decision
answer
the selection of the short-run rate of output (with existing plants and equipment)
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Economic profit (P>ATC) in the short run rate of output
answer
the difference between total revenues and total economic costs
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What do both monopolistically competitive firms and monopolies look for when making a production decision?
answer
The short run profit maximization outcome--A rate of output in which MR=MC
question
If P>ATC and there is economic profit in a monopolistically competitive firm
answer
other firms will flock to the industry because entry barriers are loW
INDUSTRY:
SUPPLY WILL INCREASE
Market cost (MC) curve will be shifted to the right
price will be pushed down on the MARKET DEMAND CURVE
FIRM:
demand curve shifts to the LEFT (bc more competition)
& becomes MORE ELASTICS because there are more close substitutes (other firms)
INDUSTRY:
SUPPLY WILL INCREASE
Market cost (MC) curve will be shifted to the right
price will be pushed down on the MARKET DEMAND CURVE
FIRM:
demand curve shifts to the LEFT (bc more competition)
& becomes MORE ELASTICS because there are more close substitutes (other firms)
question
When firms enter a monopolistically competitive industry ...
answer
The industry COST cure shifts to the right, pushing down price
The demand curves facing individual firms, shift to the LEFT
The demand curves facing individual firms, shift to the LEFT
question
Entry induced LEFT shifts will so ______ to economic profits?
answer
eliminate economic profits
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When does the profit maximizing equilibrium occur for a monopolistically competitive firm?
answer
When the demand curve is tangent to the ATC curve--best possible outcome to break even--price=ATC economic profit is 0
question
rival firms will enter a monopolistically competitive industry as long as
answer
the demand line (p) is above ATC p>ATC
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Entry and exit into a monopolistically competitive industry cease when
answer
a firms demand curve (p) is tangent to the ATC curve
question
In the long run, there are _____ economic profits in monopolistic competition
answer
NO
question
Why is there more inefficiency of production in monopolistically competitive firms than perfectly competitive firms
answer
the offer (supply) of goods at prices equal to their marginal cost
question
Marginal Cost pricing
answer
price always exceeds opportunity costs
consumers demand fewer goods
consumers demand fewer goods
question
Consequence of marginal cost price
answer
production inefficiency (above minimum average cost) and allocative inefficiency (wrong mix of output)
THIS CONTRASTS PERFECT COMPETITION WHICH DELIVERS MINIMUM AVERAGE TOTAL COST AND EFFICIENT MC BASED PRICE SIGNALS
THIS CONTRASTS PERFECT COMPETITION WHICH DELIVERS MINIMUM AVERAGE TOTAL COST AND EFFICIENT MC BASED PRICE SIGNALS
question
What does monopolistic competition result in
answer
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