1. What determines the behaviour of firms?
3.14 Operational Strategies: location
What determines the behaviour of firms?

2. Candidates should be able to:
Syllabus
Candidates should be able to:
Define monopolistic competition and explain the characteristics of monopolistically competitive markets
Show diagrammatically the profit maximising equilibrium in the short run and long run position

3. Write down the seven formula - How can you remember these?

4. Market structures: put the structures along the line below
Monopolistic competition, monopoly, oligopoly, perfect competition

5. Definition – monopolistic competition
Monopolistic competition occurs when there are _______ firms in an industry, each selling a __________ differentiated product.
The characteristics are:
Lots of ________ and sellers
No barriers - easy entry and _______ (hence strong competition)
Each firm has a degree of monopoly power because products are _____________
Firms are short run ________ maximisers
Buyers, differentiated, exit, many, profit, slightly

6. Examples
Examples include:

7. The demand curve – explanation normal, power, price, prices, supernormal
Since firms sell differentiated products they may set their own ________ (they aren’t price takers).
In the short run, firms have a fairly inelastic demand curve (reduce ________ to sell more) and can set their own prices; they make _____________________ profits
However, since there are many firms (producing relatively similar products) each individual firm has relatively little _______ in the long run. If firms are making high profits, given there are no entry barriers, others will enter the market leading to ______ profits.
Hence, in the long run, small changes in price are likely to lead to large changes in demand (relatively elastic)

8. What assumptions have you made?
Diagrams
Draw a diagram showing a monopolistic firm making abnormal (supernormal) profit in the short run
What assumptions have you made?

9. Draw a diagram showing the long run position
In the long run, more firms will enter the industry which will increase supply, shifting the AR curve down to the point where average revenue is equal to average cost.
Hence MC = ____ and AR = _____and the AC curve is a tangent to the ______ curve

10. Match the examples to the market structure:
Butter, Margarine and Olive bases spreads
Gas Company
Pentagon (military buyer)
Semiconductors, because of price of factories
Street Market
Tesco
Walmart
Dominant Monopoly >40% Legal Monopoly >25%
Monopsonist Monopolistic Competition
Natural Monopoly Oligopoly
Perfect Competition

11. Diagram: draw a diagram showing supernormal profit in the short run
Diagram: draw a diagram showing supernormal profit in the short run. Mark on three separate outputs Q* (profit maximising), Q1 (productive efficiency) and Q2 (allocative efficiency).

12. Efficiency (remember topic 3.4.1)
Why is a monopolistic competitive industry allocatively and productively inefficient?
Productive efficiency occurs when?
Allocative efficiency occurs when?
Where do these firms produce?
Firms produce when P > MC meaning that resources are
Firms do NOT produce where P = min ATC hence not

13. Limitations of monopolistic competition
Some firms are better at brand differentiation and so will be able to make ___________________ profit. New firms will not be seen as a close substitute.
Monopolistic competition assumes no barriers to entry but ________________________________________

14. What is the key difference with monopoly?
HINT – think about barriers to entry and hence profits in the long run.

15. What is the key difference with perfect competition?
HINTS – think about the products they sell; are they price takers or price makers?; what type of demand do they face (elastic? Inelastic?)