3_4_3_Monopolistic_Competition.pptx_Document

Monopolistic Competition

1. What is Monopolistic Competition? TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

2. TUTOR2U.NET/ECONOMICS THE BASICS OF MONOPOLISTIC COMPETITION Monopolistic competition is like the chill cousin of perfect competition - it's a little more relaxed, but still has some key features that make it unique: Product differentiation: Firms sell differentiated products that have some unique characteristics but are still substitutes for each other. Many firms: There are many firms in the market, but not as many as in perfect competition. Easy entry and exit: It's still relatively easy for firms to enter and exit the market. MONOPOLISTIC COMPETITION

3. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

4. What are differentiated products?

5. Which markets come close to monopolistic competition? TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

6. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

7. Number of enterprises for washing and dry cleaning of textile and fur products in UK in 2020, by turnover size band

8. Number of manufacturing enterprises for bread, fresh pastry goods and cakes in the United Kingdom from 2008 to 2018

9. Leading craft beer brands in terms of sales value in the UK in 2019  (in million British pounds)

10. Number of active beer microbreweries in the UK from 2012 to 2018

11. How is short run price and output determined in this market structure? TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

12. Short run equilibrium in monopolistic competition Price and Cost Output MR AR TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

13. Short run equilibrium in monopolistic competition Price and Cost Output MR AR Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

14. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

15. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR Q1 Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

16. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

17. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

18. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

19. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit Demand likely to be price elastic in monopolistic competition TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

20. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit Demand likely to be price elastic in monopolistic competition Supernormal Profit Any profit above normal profit TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

21. Short run dynamics in monopolistic competition

22. How is long run price and output determined in monopolistic competition? TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

23. EXAM GOLD Supernormal profits attract new suppliers with differentiated products into the market. This dilutes the market share of existing products causing an inward shift of AR and MR. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

24. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

25. Short run equilibrium in monopolistic competition MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit Be aware of the principle of minimum differentiation – entering market with similar products makes it easier for consumers to switch (because there are many close substitutes available) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

26. High profits signals the entry of new firms with new products MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

27. Long run equilibrium – exam hint MC Price and Cost Output AC MR2 AR2 P2 Q2 Draw the AR curve first Draw it so it is tangential to AC Then find the output (Q2) Draw the MR last so it cuts MC at output Q2 This is then a profit max equilibrium (MC=MR) Also, sales max since AR=AC TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

28. Long run equilibrium MC Price and Cost Output AC MR2 AR2 P2 Q2 In the long run equilibrium, average revenue is tangential to AC – meaning normal profits are being made because P=AC Draw the AR curve first Draw it so it is tangential to AC Then find the output (Q2) Draw the MR last so it cuts MC at output Q2 This is then a profit max equilibrium (MC=MR) Also, sales max since AR=AC TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

29. Adjustment to long run equilibrium in monopolistic competition

30. Is monopolistic competition a market that achieves economic efficiency in the long run? TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

31. Long run equilibrium MC Price and Cost Output AC MR2 AR2 P2 Q2 In the long run equilibrium, average revenue is tangential to AC – meaning normal profits are being made because P=AC TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

32. Is monopolistic competition economically efficient?

33. Is monopolistic competition economically efficient?

34. EXAM GOLD Consumers tend to benefit from lower prices and enhanced product choice. But there might be limited opportunities for suppliers to exploit economies of scale. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

35. EXAM GOLD There can be trade-offs between different types of economic efficiency. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

36. EXAM GOLD An increase in consumer choice does not necessarily improve our welfare. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

37. In the long run, what is a feature of monopolistic competition, but not of perfect competition? a small number of buyers product differentiation the existence of abnormal profits the existence of barriers to entry Multiple Choice (1) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

38. In the long run, what is a feature of monopolistic competition, but not of perfect competition? a small number of buyers product differentiation the existence of abnormal profits the existence of barriers to entry Multiple Choice (1) In perfect competition, all products are homogenous. This assumption is dropped in monopolistic competition. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

39. Why might the long-run equilibrium of a profit-maximising firm in a monopolistically competitive market differ from its short-run equilibrium? Advertising expenditure is possible. There are low barriers to entry. Firms experience diminishing returns. Innovation reduces the monopoly power of firms. Multiple Choice (2) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

40. Why might the long-run equilibrium of a profit-maximising firm in a monopolistically competitive market differ from its short-run equilibrium? Advertising expenditure is possible. There are low barriers to entry. Firms experience diminishing returns. Innovation reduces the monopoly power of firms. Multiple Choice (2) Absence of entry barriers allows for new products to enter the market. Long run profits fall. TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

41. Which combination indicates monopolistic competition? A B C D Multiple Choice (3) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

42. Which combination indicates monopolistic competition? A B C D Multiple Choice (3) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

43. Which of the following characteristics is shared by a monopolist and a firm operating under conditions of monopolistic competition? Low or no barriers to entry to the industry Productive efficiency in the long run Some degree of price setting power Supernormal profits in the long run Multiple Choice (4) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

44. Which of the following characteristics is shared by a monopolist and a firm operating under conditions of monopolistic competition? Low or no barriers to entry to the industry Productive efficiency in the long run Some degree of price setting power Supernormal profits in the long run Multiple Choice (4) The existence of differentiated products means that each firm has a downward-sloping demand curve (AR and MR both fall) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

45. The diagram shows a monopolistically competitive firm. Which point represents allocative efficiency? A B C D Multiple Choice (5) TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

46. The diagram shows a monopolistically competitive firm. Which point represents allocative efficiency? A B C D Multiple Choice (5) Allocative efficiency achieved at an output where price (AR) = MC TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

47. CONNECTION SPINNER Give me an example of…

48. Hairdresser Hotel Restaurant Care home Pub Bakery CONNECTION SPINNER Give me an example of… Degree of luxury, dog-friendly, ‘boutique’ Give me an example of a product differentiation strategy for a …

49. Hotel Restaurant Care home Pub Bakery CONNECTION SPINNER Give me an example of… Locally sourced ingredients, opening hours, freshness Give me an example of a product differentiation strategy for a … Hairdresser

50. Hotel Restaurant Care home Pub Bakery CONNECTION SPINNER Give me an example of… Breadth of menu, live music, non-licensee Give me an example of a product differentiation strategy for a … Hairdresser

51. Which of the following is the BEST description of the characteristics of a monopolistically competitive market? A Many firms, differentiated products, low barriers to entry and exit B Many firms, differentiated products, high barriers to entry and exit C Few large firms, differentiated products, non-price competition D Few large firms, differentiated products, price competition Which of the following is the BEST description of the characteristics of a monopolistically competitive market? * A Many firms, differentiated products, low barriers to entry and exit * B Many firms, differentiated products, high barriers to entry and exit * C Few large firms, differentiated products, non-price competition * D Few large firms, differentiated products, price competition 1 TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

52. Firms in a monopolistically competitive market can have a small degree of monopoly power over their competitors because A There are a large number of firms B Their products are differentiated C The firms are similar in size D There are low barriers to enter the market Firms in a monopolistically competitive market can have a small degree of monopoly power over their competitors because * A There are a large number of firms * B Their products are differentiated * C The firms are similar in size * D There are low barriers to enter the market 2 TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

53. A downwards sloping demand curve, such as that faced by a firm in monopolistic competition A Can be derived using the concept of diminishing marginal returns B Illustrates the impact of rising income on quantity demanded C Has constant price elasticity of demand along its length D Can be derived using the concept of diminishing marginal utility. A downwards sloping demand curve, such as that faced by a firm in monopolistic competition * A Can be derived using the concept of diminishing marginal returns * B Illustrates the impact of rising income on quantity demanded * C Has constant price elasticity of demand along its length * D Can be derived using the concept of diminishing marginal utility. 3 TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

54. A pizza firm operating in the monopolistically competitive restaurant industry has the total cost curve below. Which ONE of the following can be correctly inferred about costs over output between A and B? A Marginal cost are steadily increasing B Total costs are steadily increasing C Marginal costs are zero D Average costs are constant A pizza firm operating in the monopolistically competitive restaurant industry has the total cost curve below. Which ONE of the following can be correctly inferred about costs over output between A and B? * A Marginal cost are steadily increasing * B Total costs are steadily increasing * C Marginal costs are zero * D Average costs are constant 4 COSTS OUTPUT TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

55. A diagram representing a small, family-owned Chinese restaurant is shown below. The owners hire new managers, who wish to change the business objective from sales volume maximisation to profit maximisation . The result of this decision will be to A Lower output and reduce prices B Lower output and raise prices C Raise output and raise prices D Raise output and reduce prices A diagram representing a small, family-owned Chinese restaurant is shown below. The owners hire new managers, who wish to change the business objective from sales volume maximisation to profit maximisation . The result of this decision will be to * A Lower output and reduce prices * B Lower output and raise prices * C Raise output and raise prices * D Raise output and reduce prices 5 COSTS & REVENUE OUTPUT TUTOR2U.NET/ECONOMICS MONOPOLISTIC COMPETITION

56. STEPPING STONES Complete a chain of analysis to illustrate a cause and its effect

57. 1 2 3 4 5 In the short run, firms operating in a monopolistic competition market structure can earn supernormal (abnormal) profits These supernormal profits and low barriers to entry attract new firms The individual demand curve (or AR curve) for incumbent firms shifts to the left because their market share is reduced The incumbent firm’s average revenue curve continues to shift left until it reaches a tangent with the average cost curve, resulting in normal profit being earned. In the long run firms will earn normal profits ? ? ?

58. Identify the correct answers BUBBLE QUIZ The number of answers that are correct can range from zero to all four!

59. Both firms can make abnormal profits in the short run Both firms make normal profits in the long run Both firms are profit maximising and produce when MC = MR A Both firms are productively efficient NONE ARE CORRECT! Which of the following are similarities between a monopolistically competitive firm and a perfectly competitive firm? A Identify the correct answers. B C D 1 Both firms are productively efficient Both firms are profit maximizing and produce when MC = MR B Both firms make normal profits in the long run C Both firms can make abnormal profits in the short run D

60. AC=AR C AR>AC MC=MR A MC=AC NONE ARE CORRECT! In long run equilibrium, a monopolistically competitive firm would be most likely to operate at the output at which A Identify the correct answers. B C D 2 MC=AC MC=MR B AR>AC AC=AR D

61. A town centre convenience store offers longer opening hours C A pizza delivery business offers a buy-one-get-one-free promotion An online retail business aims to offer better customer service with specified delivery times for orders A high street coffee shop offers vouchers with every purchase which can be collected and used for a free pastry after ten visits NONE ARE CORRECT! Which of the following are examples of non-price competition? A Identify the correct answers. B C D 3 A coffee shop offers vouchers with every purchase which can be used for a free pastry A An online retailer aims to offer better customer service with specified delivery times B A pizza delivery business offers a buy-one-get-one-free promotion A town centre convenience store offers longer opening hours D

62. EVAL-U-WHEEL You are about to see a line of argument that a student has made as part of an answer to an essay question. The random ‘Eval-u-wheel’ will select a possible line of evaluation for you to add to the response. DEPENDS ON… HOWEVER… EFFICIENCY EQUALITY / EQUITY ASSUMPTIONS PERSPECTIVES

63. ? HOWEVER… EVAL-U-WHEEL What possible negative view can be given? With markets that have a monopolistic competition structure prices are above marginal cost meaning that the equilibrium is not allocatively efficient. Student argument: However, competition within the market drives innovation and increases consumer choice leading to greater dynamic efficiency.