Draw a table comparing the key characteristics of
PC and MC
Characteristic Under PC Under MC
Understand the characteristics of a monopolistically
competitive market and be able to use these to explain the
behaviour of firms in this market structure.
Students should be able to carry out diagrammatic analysis
of the market structure in both the short and long run.
Students should understand the importance of advertising
and differentiation for the model of monopolistic competition
and be able to contrast this with other market structures.
Students should be able to explain and evaluate the
efficiency of monopolistic competition.
Review characteristics of MC
Recognise the importance of advertising and
differentiation In MC
Diagrammatically explain short and long run
equilibrium in MC
To explain and evaluate the efficiency of
Key characteristics of What’s
Monopolistic Competition difference
There are many producers and many consumers in a
market - the concentration ratio is low & they act
The barriers to entry and exit into and out of the market are
The firms are short run profit maximisers.
Consumers see that there are non-price differences among
the competitors’ products i.e. there is product
Producers have some control over price - they are “price
makers” rather than “price takers.”
Get into the pattern of how we
1. Define characteristics
2. Behaviour of firms
3. The diagrams
4. Assess efficiency
Firms produce differentiated products, although
there are substitutes for each firm’s products.
There is a downward sloping D curve – and elastic!
Each firm tries to build brand loyalty to create loyal
There tends to be heavy advertising
Ease of entry & exit
There are ‘no’ barriers to entry & exit.
The existence of short term abnormal
profits gives incentives for other companies
to start up.
The existence of short term losses give
incentives for companies to close down!
Low concentration ratios
What is the concentration ratio of a monopoly?
What is the concentration ratio of a duopoly?
What is the concentration ratio of a oligopoly?
What concentration ratio ‘border line’ will there be
for a monopolistic competitive market?
Under MC concentration ratio tends
to be low so many firms operating
Low concentration ratios in the market. A price change by
one will have negligible effects on
the demand for very least
No concentration: 0% means perfect competition or at therival products
monopolistic competition. If for example CR4=0 %, the 4 largest firm in
the industry would not have any significant market share.
Total concentration: 100% means an extremely concentrated
oligopoly. If for example CR1= 100%, we talk of a monopoly.
Low concentration: 0% to 50%. This category ranges from perfect
competition to oligopoly.
Medium concentration: 50% to 80%. An industry in this range is likely
High concentration: 80% to 100%. This category ranges from
oligopoly to monopoly
Is there any differentiation between these
Is there any opportunity for differentiation?
How have these brands attempted to
influence you as a consumer?
Advertising in MC
Firms produce differentiated products
Face downward sloping demand curves
Build up brand loyalty
Gives them some influence over price
=> engage in heavy advertising to maintain
brand loyalty When we analyse markets
we look at how firms
BEHAVE under different
Diagrams – your go
Side by side
Draw the curve for profit maximisation under
Draw the curve for profit maximisation under
I’ll start you off…
The role of advertising in
With abnormal profits and ‘no’ barriers to entry
Companies use significant advertising to encourage brand loyalty
There is a lot of product differentiation
As more companies enter the market – the individual company’s
Demand curve might shift LEFT – due to substitution effect
So the companies spend MORE money on advertising – which
will push up their AC curve
The inward shift of the Demand curve
The outward shift of the MC curve
….. Will result in a Normal profit scenario
The effect of Short run
advertising equilibrium under
Normal profit under monopolistic
At any other output ATC >AR, so the
firm will make losses.
Is there ever an equilibrium?
Strong brand loyalty can have the effect of making demand less
sensitive to price.
The long run equilibrium may be reached with normal profits
being made. The reality is that a stable equilibrium is never
reached - new products come and go all of the time, some do
better than others.
Existing products within a market will typically go through a
product life cycle which affects the volume and growth of
No – since Qm rather
There is a market
They are also not
economies of scale
No since Pm > MC
In a truly competitive market the Po would
exist – so there is misuse of the consumer
Consumers are over
charged and firms
produce under their
There are profits for product development.
There is an incentive for the companies to
invest in R&D & new ideas…. As the product
is always being developed
So YES – there is an incentive to be
It can increase costs
The debate over the environmental impact of
packaging is linked strongly to this aspect of
List 4 characteristics of MC
Draw the LR equilibrium
Peter Smith p51 diagram ex 3.1
Anderton Textbook p344 Q2
Due Oct 18