Study Guide for Economics
B. Answers to Short-Answer, Essays, and Problems
1. What are the major features of monopolistic competition compared to pure competition and pure monopoly?
In monopolistic competition, there are a relatively large number of firms, not the thousands of firms as in pure competition. The monopolistically competitive firms produce differentiated products, not the standardized products of pure competition. Product differentiation means that monopolistic competitors engage in some price competition because they have some limited “price making” ability based on the less elastic demand for their particular product. This demand, however, is more elastic than the demand for monopolists’ products. Monopolistic competitors, unlike most monopolists and all purely competitive firms, will engage in nonprice competition that gets reflected in product quality, services, location, advertising, and packaging. Compared with monopoly, the barriers to entry for monopolistically competitive firms are minor. The firms typically are small in size, operate independently, and do not practice collusion. [text: E pp. 486-488; MI pp. 228-230]
2. “Pure competition or pure monopoly industries will tend to be one-price industries. Monopolistic competition, however, is a multiprice industry.” Explain.
Monopolistic competition has the fundamental feature of product differentiation. This gives each firm a slight degree of monopolistic control over price. Consumers have preferences for the products or services of specific sellers and within limits will pay a higher price to satisfy those preferences.
In pure competition the demand curve facing each individual seller is perfectly elastic because all products are standardized. The seller and buyer must accept the market price in buying and selling. At the opposite extreme, a pure monopoly is the only seller and so is able to set the price. [text: E pp. 486-488; MI pp. 228-230]
3. How does economic rivalry take
1. What are the major features of monopolistic competition compared to pure competition and pure monopoly?
In monopolistic competition, there are a relatively large number of firms, not the thousands of firms as in pure competition. The monopolistically competitive firms produce differentiated products, not the standardized products of pure competition. Product differentiation means that monopolistic competitors engage in some price competition because they have some limited “price making” ability based on the less elastic demand for their particular product. This demand, however, is more elastic than the demand for monopolists’ products. Monopolistic competitors, unlike most monopolists and all purely competitive firms, will engage in nonprice competition that gets reflected in product quality, services, location, advertising, and packaging. Compared with monopoly, the barriers to entry for monopolistically competitive firms are minor. The firms typically are small in size, operate independently, and do not practice collusion. [text: E pp. 486-488; MI pp. 228-230]
2. “Pure competition or pure monopoly industries will tend to be one-price industries. Monopolistic competition, however, is a multiprice industry.” Explain.
Monopolistic competition has the fundamental feature of product differentiation. This gives each firm a slight degree of monopolistic control over price. Consumers have preferences for the products or services of specific sellers and within limits will pay a higher price to satisfy those preferences.
In pure competition the demand curve facing each individual seller is perfectly elastic because all products are standardized. The seller and buyer must accept the market price in buying and selling. At the opposite extreme, a pure monopoly is the only seller and so is able to set the price. [text: E pp. 486-488; MI pp. 228-230]
3. How does economic rivalry take