Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECON 101 > Chp 13 - monopolistic competition > Flashcards

Chp 13 - monopolistic competition Flashcards

1
Q

what is a monopolistic competition?

A

a market structure in which:
1. a large number of firms compete
2. each firm produces a differentiated product
3. firms compete on product quality, price and marketing
4. firms are free to enter and exit the industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what’s the 3 implications for each individual firm in the industry in a monopolistic competition

A
  1. small market share - each firm supplies a small part of the total industry –> thus each firm has only limited power to influence the price of tis product as firm’s price can deviate from the average price of other firms by a relatively small amount
  2. ignore other firm - a firm must be sensitive to the average market price of the product, but the firm does not pay attention to any one individual competitor –> all firms are relatively small so no one firm can dictate market conditions and the actions of no one firm directly affect the actions of the other firms
  3. collusion impossible - firms would like to be able to conspire to fix a higher price (collusion) but bc the number of firms is large, coordination is difficult and collusion is not possible
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

define product differentiation

A

a firm makes a product that is slightly different from the product of competing firms and is a close substitute for the products of the other firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

product differentiation allows firms to compete with other firms in which 3 areas? and how?

A
  1. quality - physical attributes that make it different from the products of other firms (design, reliability, services provided to buyer, buyer’s ease of access to the product)
  2. price - firms can set its price and output - tradeoff between price and product’s quality
  3. marketing - firm must market its product - advertising + packaging
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

does a firm in monopolistic competition make economic profit in the long-run? why?

A

they cannot make an economic profit in the long-run bc in the long-run firms neither enter nor leave the industry (as monopolistic competition have no barriers to prevent new firms from entering the industry in the long-run)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

how of economists measure whether a market is sufficiently competitive to be classified as monopolistic competition

A

measure of concentration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what are the 2 main measures of concentration

A
  1. the 4-firm concentration ratio
  2. the Herfindahl-Hirschman Index
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

define the 4-firm concentration ratio? what does a low or high concentration ratio mean?

A

the percentage of the total revenue accounting for by the 4 largest firms in an industry - main measure used to assess market structure

a low concentration ration indicates a higher degree of competition and vice versa

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what does a concentration ratio of 60% or more in the 4-firm concentration ration mean?

A

60% - a market that is highly concentrated and dominated by a few firms

less than 60% - an indication of a competitive market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

define the herfindahl hirschman index (HHI)

A

the square of the percentage market share of each firm summed over the largest 50 firms in a market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

in perfect competition, herfindahl-hirschman is ___

A

small

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what’s the HHI value of a monopoly

A

10,000 (100^2 * 1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

when is a market regarded as being competitive in HHI values?

A

1,500-2,500

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what’s the market for an HHI that exceeds 2,500

A

being concentrated and uncompetitive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

describe an oligopoly in term is HHI and concentration ratio

A

a market with a high concentration ration and high HHI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what are the limitations of a concentration measure? explain

A
  1. geographical scope of the market - concentration measures take a national view of the market - many goods are sold in a national market but some are sold in a regional or global market
  2. barriers to entry and firm turnover - some market are highly concentration (entry = easy and large firm turnover rate) and a market with a few firms might be competitive because of potential entry
  3. market and industry correspondence - markets do not always correspond closely to industries bc 1. markets are often narrower than industries 2. most firms make several products
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

how does a firm in monopolistic competition look at deciding profit-maximizing/loss minimization and quantity?

A

where MC = MR, and the price of ATC and demand curve correlate - similar to a single priced monopoly

produces the quantity at which MR = MC and then charges the price that buyers are willing to pay for that quantity as determined by the demand curve

18
Q

what happens in the long-run for firms in monopolistic competition

A

they make zero economic profit

19
Q

what are the 2 difference between monopolistic competition and perfect competition

A
  1. excess capacity
  2. markup
20
Q

when does the firm have excess capacity

A

if the firm produces less than its efficient scale - the quantity at which ATC is at minimum

21
Q

fill in the blank: ATC is the lowest possible cost only in _______ competition

A

perfect

22
Q

what is a firm’s markup

A

the amount by which price exceeds marginal cost

23
Q

what does the markup between price and marginal cost in monopolistic competition arise from?

A

product differentiation

24
Q

describe the relationship between benefit and value

A

the benefit of a good would be less if there’s less variety since people value variety but variety is costly

25
Q

define setup costs

A

initial costs of design and marketing

26
Q

what’s the efficient degree of product variety

A

the MSB = MSC of the product

27
Q

fill in the blanks: the loss that arises bc the quantity produced is ____ than the efficient quantity is ____ by the gain that arises from having a greater degree of product variety

A

less, offset

28
Q

is monopolistic competition efficient?

A

perhaps

29
Q

how does a firm in monopolistic competition maintain economic profit

A
  1. develop an entirely new product
  2. develop a significantly improved product that provides it a competitive edge (temporarily)
30
Q

what’s the marginal cost of product development

A

the marginal dollar spent on developing a new or improved product

31
Q

what’s the marginal revenue of product development

A

the marginal dollar that the new or improved product earns for the firm

32
Q

what does it mean when:
(1) MR> MC of product development
(2) MR<MC of product development
(3) MR = MC of product development

A
  1. at a low level of product development
  2. at a high level of product development
  3. the firm is undertaking the profit-maximizing amount of product development
33
Q

in a monopolistic competition is the profit-maximizing amount of product development the efficient amount?

A

no, as the marginal revenue is less than the price in a monopolistic competition, so product development is not pushed to its efficient level.

monopolistic competition brings many product changes that cost little to implements and are purely cosmetic - improvement to products are not as good as the consumer would like and for which the consumer is willing to pay a higher price

34
Q

how do firms differentiate their products when the difference is small in a monopolistic competition

A
  1. advertising
  2. packaging
35
Q

how does advertising expenditures affect the profits of the firm?

A
  1. they increase costs
  2. they change demand
36
Q

why do firms incur huge costs in monopolistic on selling the product?

A

to ensure that buyers appreciate and value the differences between their own products and those of their competition

37
Q

are selling cost a fixed cost?

A

yes

38
Q

what’s the relationship between selling costs and a firm’s total cost?

A

selling costs increase the firm’s total cost

39
Q

selling costs per unit ___ as the quantity produced increases

A

decreases

40
Q

how does selling costs affect demand?

A

may initially increase the demand for a firm, and then the number of firms in the market might increase which leads to advertising decrease the demand faced by any one firm –> the demand for 1 firm’s product more elastic

advertising can lower ATC and lower the markup and price

41
Q

define a signal in advertising

A

an action taken by an informed person (of firm) to send a message to uninformed people

42
Q

why does a firm spend a lot of money promoting a brand name

A

brand name provides info to consumers about the quality of a product and is an incentive to the producer to achieve a high and consistent quality standard

ECON 101 (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions