You are on page 1of 9


and production. Microeconomics starts by thinking about how individuals make decisions. and of taxes and government expenditures. level. people appear to use their resources in ways that don't improve their well-being. Wellbeing includes the satisfaction people gain from the products and services they choose to consume. the land. Important choices involve how much time to devote to work. Sometimes. such as "how does a change in interest rates influence national savings?" . people appear to use their resources to improve their well-being. Macroeconomics considers aggregate outcomes. How does the change of a price of good influence a family's purchasing decisions? If my wages rise. which deals with the sum total of the decisions made by individuals in a society. Although the behavior of individuals is important. and how to vote and shape the level of taxes and the role of government. will I be inclined to work more hours or less hours?" What is macro economics? Contrast the above definition to the study of macroeconomics. The two points of view are essential in understanding most economic phenomena. Resources include the time and talent people have available. how many dollars to spend and how many to save. equipment. from their time spent in leisure and with family and community as well as in jobs. however. income. and the security and services provided by effective governments. and investments. how to combine resources to produce goods and services. Economists seek to measure well-being. In short. and other tools on hand. to school. or micro. Often. and to evaluate the well-being of the rich and the poor. to learn how well-being may increase over time. of money. buildings. economics includes the study of labor. land. and the knowledge of how to combine them to create useful products and services. economics also addresses the collective behavior of businesses and industries. What is micro economics? Microeconomics "deals with economics decisions made at a low. and the globe as a whole. and to leisure.What is economics? Economics is the study of how people choose to use resources. governments and countries.

g. the 5 firm concentration ratio for supermarkets is about 58%     How Firms In Oligopoly are Expected to behave There are different possible ways that firms in oligopoly will compete and behave this will depend upon:    the objectives of the firms e. profit max or sales max the degree of contestability i. firms will be effected by how other firms set price and output Barriers To Entry.Oligopoly: Features of Oligopoly   An industry which is dominated by a few firms. barriers to entry government regulation The Kinked Demand Curve Model The Kinked Demand Curve Graph . E.e. but less than Monopoly Differentiated Products. UK definition of an oligopoly is a five firm concentration ratio of more than 50% (this means they have more than 50% of the market share) Interdependence of Firms.g. advertising is often important Most Common Market Structure Definition of Concentration Ratios: This is a tool for measuring the market share of the 5 biggest firms in the industry.

Therefore other firms follow suit and cut price as well. it can also lead to inferior products and services. therefore demand is elastic for price increases.  This assumes that firms seek to maximise profits If they increase price. however it is unlikely that firms will allow this. This encourages private businesses and investments. but is great for the consumer. these shareholders in private companies are called capitalists. A true monopoly rarely exists because if there is no competition. Pros and Cons   Pro: Prices in an oligopoly are usually lower than in a monopoly. Profits are distributed among the owners and shareholders. Capitalism Capitalism is a condition where there is open competition. price. but these are regulated by the government. then they will lose a large share of the market because they become uncompetitive compared to other firms. as compared to a government-run system. and private ownership of production. The result lowers the profit margin for all the companies. If firms cut price then they would gain a big increase in Market share. Pro: Prices tend to remain stable because if one company lowers the price too much. business will increase the price while reducing output to increase profits. a free market. With capitalism. then the others will do the same. and distribution which are controlled by business owners and investors. Not only does a monopoly cause higher prices. but higher than it would be in a competitive market. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut Therefore this suggests that prices will be rigid in Oligopoly   Monopoly A monopoly is exclusive control of the market by one business because there is no other group selling the product or offering the service. like in public utilities. Antitrust laws keep this type of market condition from existing. A “natural monopoly” exists where having more than one supplier is inefficient. the market is regulated through the dictates of supply and demand. .

In the case of restaurants. Con: Oligopolies develop in industries that require a large sum of money to start. Once inside the restaurant. including independently owned and operated high-street stores and restaurants. location. marketing. Most competition between companies in an oligopoly is by means of research and development (or innovation). its market. each one offers something different and possesses an element of uniqueness. and itscosts of production. 2. and lower prices with the intention of keeping new companies out. access to technology. have agreements to get lower prices from suppliers. Con: Major barriers keep companies from joining oligopolies. cost advantages as the result of mass production. patents. Monopolistic competition The model of monopolistic competition describes a common market structure in which firms have many competitors. they cannot fully appreciate the restaurant or the meal until after they have dined. based on its product. companies in oligopolies establish exclusive dealerships. but it is unlikely to be perfect. they can view the menu again. However. Each firm makes independent decisions about price and output. . For example. Many small businesses operate under conditions of monopolistic competition. and actions of the businesses in the oligopoly. Characteristics Monopolistically competitive markets exhibit the following characteristics: 1. Lastly. such as limiting the number of licenses that are issued. packaging. and the cost of convincing consumers to try a new product.   Con: Output would be less than in a competitive market and more than in a monopoly. Barriers can also be imposed by the government. before ordering. diners can review all the menus available from restaurants in a town. Knowledge is widely spread between participants. and English economist Joan Robinson. Existing companies in oligopolies discourage new companies because of exclusive access to resources or patented processes. The major barriers are economies of scale. but all are essentially competing for the same customers. Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin. but each one sells a slightly different product. before they make their choice. and the production of a product that is slightly different than the other company makes.

such as Amazon. 9. though the industry price may be a guideline. 2. colour. There is freedom to enter or leave the market. 4. Common methods of advertising for these firms are through local press and radio. shape. including distribution via mail order or through internet shopping. posters. 7. the level of training received. Physical product differentiation. to let customers know their differences. This also means that the demand curve will slope downwards. Firms operating under monopolistic competition usually have to engage in advertising. where firms use size. A central feature of monopolistic competition is that products are differentiated. Marketing differentiation. distinctive uniforms. breakfast cereals can easily be differentiated through packaging. For example. and may need to advertise on a local basis. 6. where the firm creates differences through the skill of its employees. and features to make their products different. The firm can set its own price and does not have to „take' it from the industry as a whole. The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision leaflets and special promotions. For example. Firms are often in fierce competition with other (local) firms offering a similar product or service. There are four main types of differentiation: 1. local cinema. Differentiation through distribution. where firms try to differentiate their product by distinctive packaging and other promotional techniques. Firms are price makers and are faced with a downward sloping demand curve. 3. There are usually a large numbers of independent firms competing in the market. 4. Because each firm makes a unique product. design. Monopolistically competitive firms are assumed to be profit maximisers because firms tend to be small with entrepreneurs actively involved in managing the business. and so on. it can charge a higher or lower price than its rivals. 10. . which differentiates itself from traditional bookstores by selling online. performance. 5. consumer electronics can easily be physically differentiated. as there are no major barriers to entry or exit. Human capital differentiation. or becomes a constraint.

good knowledge and an opportunity to differentiate. firms have reached their long run equilibrium. As new firms enter the market.Equilibrium under monopolistic competition In the short run supernormal profits are possible. Eventually. New entrants continue until only normal profit is available. because of low barriers to entry. driving down price. At this point. MC = MR. . Monopolistic competition in the long run Super-normal profits attract in new entrants. all super-normal profits are eroded away. and output is Q and price P. demand for the existing firm‟s products becomes more elastic and the demand curve shifts to the left. supernormal profits are possible (area PABC). but in the long run new firms are attracted into the industry. which shifts the demand curve for existing firm to the left. Monopolistic competition in the short run At profit maximisation. Given that price (AR) is above ATC at Q.

therefore markets are relatively contestable. Evaluation The advantages of monopolistic competition Monopolistic competition can bring the following advantages: 1. such as:     The restaurant business Hotels and pubs General specialist retailing Consumer services. The majority of small firms in the real world operate in markets that could be said to be monopolistically competitive. Examples of monopolistic competition Examples of monopolistic competition can be found in every high street. Monopolistically competitive firms are most common in industries where differentiation is possible. the firm benefits most when it is in its short run and will try to stay in the short run by innovating. . There are no significant barriers to entry.Clearly. such as hairdressing The survival of small firms The existence of monopolistic competition partly explains the survival of small firms in modern economies. and further product differentiation.

3. such as excess packaging.2. including: 1. Advertising may also be considered wasteful. The disadvantages of monopolistic competition There are several potential disadvantages associated with monopolistic competition. they may be dynamically efficient. However.less allocatively and less productively efficient. innovative in terms of new production processes or new products. For example. a typical high street in any town will have a number of different restaurants from which to choose. choice and utility. there is allocative inefficiency in both the long and short run. For example. Differentiation creates diversity. . but it is still inefficient. This is because price is above marginal cost in both cases. retailers often constantly have to develop new ways to attract and retain local custom. 2. In the long run the firm is less allocatively inefficient. though most is informative rather than persuasive. The market is more efficient than monopoly but less efficient than perfect competition . As the diagram illustrates. Some differentiation does not create utility but generates unnecessary waste. assuming profit maximisation.