Monopolistic Competition Lesson aims: To explain the main assumptions of a monopolistically competitive market To understand the downward sloping and elastic shape of a monopolistically competitive firm’s demand curve To be able to draw and explain a long run equilibrium monopolistic competition diagram

Starter (3 minutes): 1.What do ‘perfect’ and ‘imperfect’ competition mean? 2.What are the differences between monopoly, oligopoly and perfect competition?

Monopolistic competition – Assumptions Large number of buyers and sellers No barriers to entry or exit Firms are short run profit maximisers Firms produce differentiated, or non- homogenous products

Can you think of any examples of monopolistic competition markets? Examples: Hotels Travel agencies Bakeries Car garages Cafes Coach travel Ready meals Clothes companies Magazines Leisure centres

Downward sloping and elastic demand curve Firms in a monopolistically competitive market are not ‘price- takers’ as such as in a perfectly competitive market, as their products are differentiated However, there are large numbers of firms and will be close substitutes for goods and services; therefore the market power of firms is low Small price changes may lead to larger changes in demand, so the demand curve will be relatively elastic and downward sloping The marginal revenue (MR) curve is twice as steep as the average revenue (AR) curve

Question 1, p.343 (8 minutes)

Long run equilibrium

The firm produces at MC=MR, as it is a profit maximiser Because of freedom of entry, it cannot earn supernormal profits in the long run, as new firms will be attracted to those profits and erode them, shifting the AR curve down Similarly, any firms making a loss will leave the industry, pushing the AR curve up, due to freedom of exit Therefore, the firms in the industry make normal profit, and at the maximising output, the AC curve touches (or is tangential to) the AR curve See Fig.2, p.344 Draw this diagram in your notes

Now and homework Now: Question 2, p.344 Homework: The music retailing market, p.345

So… What is monopolistic competition? What are the main assumptions of a monopolistically competitive market? What examples of monopolistically competitive markets are there? Why is the demand curve elastic? Why can firms in monopolistic competition not earn supernormal profits in the long run?