AP Microeconomics Flashcards: Monopolistic Competition
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
Why does allocative inefficiency exist in monopolistic competition?
Allocative inefficiency exists because the firm produces at a quantity where the price is greater than the marginal cost (P > MC).
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Why does allocative inefficiency exist in monopolistic competition?
Allocative inefficiency exists because the firm produces at a quantity where the price is greater than the marginal cost (P > MC).
What is a primary method firms use to create differentiated products in monopolistic competition?
Firms in monopolistic competition typically use advertising as a primary means of differentiating their product.
If a graph shows a monopolistically competitive firm's price is below its average total cost at the profit-maximizing quantity, what is the firm experiencing?
Based on the graph, the firm is experiencing a short-run economic loss.
What happens to economic profit in a monopolistically competitive market in the long run, and why?
Free entry and exit of firms into the market drive long-run economic profits to zero.
What is meant by "excess capacity" in monopolistic competition?
Excess capacity means the firm's long-run output level is smaller than the output level needed to minimize average total costs.
What are the possible short-run profit outcomes for a firm in monopolistic competition?
In a market with monopolistic competition, firms may earn positive, negative, or zero economic profit in the short run.
How does the long-run output level of a monopolistically competitive firm compare to the output level that minimizes average total cost?
The firm's output level is smaller than the output level needed to minimize average total costs, which results in excess capacity.
If firms in a monopolistically competitive market are earning positive short-run profits, what will happen to the demand for an individual firm's product in the long run?
New firms will enter the market, causing the demand for an individual firm's product to decrease and become more elastic until profits are zero.
What causes deadweight loss in a monopolistically competitive market?
Deadweight loss is created because the price is greater than marginal cost, resulting in an output level that is below the allocatively efficient level.
On a graph for a monopolistically competitive firm, how would you calculate the area of profit or loss?
You calculate the area of profit or loss by finding the rectangle formed by the difference between price and average total cost at the profit-maximizing quantity, multiplied by that quantity.