CFA Level IEconomicsEasy
A market is characterized by many firms selling slightly differentiated products, relatively low barriers to entry and exit, and each firm facing a downward-sloping demand curve. In the long run, economic profits tend toward zero. Which market structure best describes this scenario?
- APerfect competition
- BMonopolistic competition
- CMonopoly
- DOligopoly
Show answer & explanationAnswer & explanation
Correct answer: B. Monopolistic competition
Monopolistic competition features many sellers, product differentiation, low entry barriers, and a downward-sloping firm demand curve, with long-run economic profits driven to zero by entry.
Why the other options are wrong
- A. Perfect competition requires homogeneous products and a horizontal (perfectly elastic) demand curve.
- C. Monopoly has a single seller with high barriers to entry.
- D. Oligopoly involves few interdependent firms, not many.
Monopolistic Competition
A market structure with many sellers offering differentiated products, low barriers to entry, and downward-sloping individual demand curves.
- Long-run economic profit = 0 due to entry
- Firms have some pricing power from differentiation
- Excess capacity exists relative to perfect competition
Memory trick: Think 'MC' = Many Competitors with slightly different products.