2. Table of Contents Access Prior Knowledge New Information Set Goals
Activity
Conclusion
Identifying
Market Structure
“Monopolistic
Competition” Targets
Characteristics
Product
Differentiation
“Monopolistic
Competition” Targets
How It Differs
Product
Differentiation
Short Run
vs. Long Run
Advertising
Branding

3. Identifying Market Structure
The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below.
Perfect Competition (PC)
Monopolistic Competition (MC)
Oligopoly (O)
Monopoly (M)
Pass out one copy of “Identifying Market Structure” to each student. Students can work in pairs, individually, groups, or however you want. (This lesson is designed under the assumption students have already been exposed to the ideas of perfect competition, monopoly, and oligopoly.) More detailed instructions are provided on the student worksheet, answer key, and lesson plan.

4. Identifying Market Structure
The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below.
Perfect Competition (PC)
Monopolistic Competition (MC)
Oligopoly (O)
Monopoly (M)
_____ 1) Diamonds
_____ 9) Tomatoes
_____ 2) Wheat
_____ ) Strawberries
_____ 3) Airline Travel
_____ ) Hair Salons
_____ 4) Fast Food Restaurants
_____ ) Local Electric Company
_____ 5) American Automobiles
_____ ) Breakfast Cereals
Allow time for students to come up with answers. Before clicking the “Show Answers” button, ask students which ones they were unsure about and come up with a solution as a class. (You can even write the class’ answers to the RIGHT of each market if you are projecting this slideshow onto a writeable surface. When you advance to the next slide, the answers will appear in the blank slots, on the LEFT. By writing the class’ answers to the right, you can compare their answers with the correct ones on the next slide.)
_____ 6) Shampoo
_____ ) Retail Clothing Stores
_____ 7) Cell Phone Service
_____ ) National Football League (NFL)
Show
Answers
_____ 8) Amtrak Train Travel
_____ ) Televisions

5. Identifying Market Structure
The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below.
Perfect Competition (PC)
Monopolistic Competition (MC)
Oligopoly (O)
Monopoly (M) M PC
_____ 1) Diamonds
_____ 9) Tomatoes PC PC
_____ 2) Wheat
_____ ) Strawberries O MC
_____ 3) Airline Travel
_____ ) Hair Salons MC M
_____ 4) Fast Food Restaurants
_____ ) Local Electric Company O O
_____ 5) American Automobiles
_____ ) Breakfast Cereals MC MC
_____ 6) Shampoo
_____ ) Retail Clothing Stores O M
_____ 7) Cell Phone Service
_____ ) National Football League (NFL) M MC
_____ 8) Amtrak Train Travel
_____ ) Televisions

6. “Monopolistic Competition” Targets
Knowledge 5 Understand the definition and characteristics of a market that is in monopolistic competition.
Reasoning 8 Explain why monopolistic competition often leads to product differentiation, advertising, and branding.

7. Characteristics
Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition.

8. Characteristics
Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition.
1) Many Sellers
Each firm has a small amount of market power, but there is no possibility for collusion.
Shampoo is a great example of just how many different firms can exist in a single market, all with differing prices and qualities.

9. Characteristics
Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition.
1) Many Sellers
Each firm has a small amount of market power, but there is no possibility for collusion.
2) Differentiated Products
Firms produce imperfect substitutes, products that are close substitutes but are still distinct.
Cheeseburgers from McDonald’s and Burger King could be considered substitutes, but most consumers consider them to be very different.

10. Characteristics
Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition.
1) Many Sellers
Each firm has a small amount of market power, but there is no possibility for collusion.
2) Differentiated Products
Firms produce imperfect substitutes, products that are close substitutes but are still distinct.
3) Low Barriers to Entry
In the long run, firms are free to enter or exit the industry.
Markets, such as hair salons, can see lots of new entrants in a short time if the market can support them. Likewise, many can fail quickly, too.

11. How It Differs
The items below list how monopolistic competition differs from the other market structures.

12. How It Differs
The items below list how monopolistic competition differs from the other market structures.
1) Perfect Competition
MC firms have some power to set prices, and products are not identical.
Pizza restaurants have some ability to affect the price of their pizzas, but beyond a certain point people will simply purchase from a competitor.

13. How It Differs
The items below list how monopolistic competition differs from the other market structures.
1) Perfect Competition
MC firms have some power to set prices, and products are not identical.
2) Monopoly
MC firms do sell unique products, but imperfect substitutes provide competition.
All guitar manufacturers certainly make distinctive products, but most consumers would consider many guitars to be substitutes for each other.

14. How It Differs
The items below list how monopolistic competition differs from the other market structures.
1) Perfect Competition
MC firms have some power to set prices, and products are not identical.
2) Monopoly
MC firms do sell unique products, but imperfect substitutes provide competition.
3) Oligopoly
There is free entry and there are many MC firms, which prevents collusion.
The number of clothing stores available makes collusion between firms impossible.

15. Product Differentiation
One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways.

16. Product Differentiation
One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways.
1) By Style or Type
Includes differences in features, design, packaging, or service.
No two hair salons are alike. Each offers different hair styles based on gender, age, culture, income, preference, etc.

17. Product Differentiation
One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways.
1) By Style or Type
Includes differences in features, design, packaging, or service.
2) By Location
Consumers often choose a product based on convenience even if it is more expensive.
Many small hair salons can succeed because people are likely choose one that is close to their house.

18. Product Differentiation
One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways.
1) By Style or Type
Includes differences in features, design, packaging, or service.
2) By Location
Consumers often choose a product based on convenience even if it is more expensive.
3) By Quality
Some professional stylists can charge hundreds of dollars per customer, but most consumers settle for something cheaper than that.
Some consumers are willing to pay more for higher quality products.

19. Short Run vs. Long Run
Firms can make abnormal profits in the short run but not in the long run.
These slides require an understand of business costs, revenue, and profit for a firm with market power. The general idea behind these slides can still be conveyed to the students without this knowledge, but it will be difficult. The main idea of these slides is that because monopolistic competition has free entry, profits will be eliminated in the long run by new firms snatching up any leftover profit.

20. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
MR1 MC
ATC D1 D1
DTotal
Notice that the graph on the right mirrors the graph on the left. Each D1 curve is identical. The green (Dtotal) curve represents the industry demand as a whole. The D1 curve is an individual firm’s demand curve.

21. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
A) A profitable firm will attract new firms to the market.
MR1 MC
ATC D1 D1
DTotal
This firm is making a profit because the ATC is below demand where MR = MC.
Profit

22. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
A) A profitable firm will attract new firms to the market.
B) More competitors decreases each firm’s demand curve.
MR1 MC
ATC D1 D1
DTotal D2 D1
DTotal
The total demand has not changed, just the demand for each individual firm.
Profit

23. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
A) A profitable firm will attract new firms to the market.
B) More competitors decreases each firm’s demand curve.
C) Individual demand curves decrease like this until profits are gone.
MR2 MC
ATC D2
MR1 MC
ATC D1 D1
DTotal D2 D1
DTotal
Thus, abnormal profits can only be earned in the short run, not the long run. This is one of the ways in which monopolistic competition is similar to perfect competition. Have students draw this decrease in demand on the graph on their note sheets.
No Profit

24. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
2) A Firm Suffering a Loss
A) A profitable firm will attract new firms to the market.
B) More competitors decreases each firm’s demand curve.
C) Individual demand curves decrease like this until profits are gone. MC
ATC D3
MR3 D3
DTotal
Notice that the graph on the right mirrors the graph on the left. Each D3 curve is identical. The green (Dtotal) curve represents the industry demand as a whole. The D3 curve is an individual firm’s demand curve.

25. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
2) A Firm Suffering a Loss
A) A profitable firm will attract new firms to the market.
A) Unprofitable firms will cause firms to leave the market.
B) More competitors decreases each firm’s demand curve.
C) Individual demand curves decrease like this until profits are gone. MC
ATC D3
MR3 D3
DTotal
Loss
This firm is suffering a loss because the ATC is above demand where MR = MC.

26. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
2) A Firm Suffering a Loss
A) A profitable firm will attract new firms to the market.
A) Unprofitable firms will cause firms to leave the market.
B) More competitors decreases each firm’s demand curve.
B) Fewer competitors increases each firm’s demand curve.
C) Individual demand curves decrease like this until profits are gone. MC
ATC D3
MR3 D3
DTotal D3
DTotal D4
Loss
The total demand has not changed, just the demand for each individual firm.

27. Short Run vs. Long Run 1) A Firm Making a Profit
Firms can make abnormal profits in the short run but not in the long run.
1) A Firm Making a Profit
2) A Firm Suffering a Loss
A) A profitable firm will attract new firms to the market.
A) Unprofitable firms will cause firms to leave the market.
B) More competitors decreases each firm’s demand curve.
B) Fewer competitors increases each firm’s demand curve.
C) Individual demand curves decrease like this until profits are gone.
C) Individual demand curves increase like this until any losses are gone. MC
ATC D4
MR4 MC
ATC D3
MR3 D3
DTotal D3
DTotal D4
No Loss
Although monopolistic competition has zero profit in the long run, it is generally not regarded as a perfectly efficient market structure. Notice that the firm does not operate at the minimum cost output (where ATC is its lowest). It is debatable as to whether this is truly inefficient or not. Have students draw this increase in demand on the graph on their note sheets.

28. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.

29. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.
1) Why do firms advertise?
A) It helps differentiate their products from other firms.

30. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.
1) Why do firms advertise?
A) It helps differentiate their products from other firms.
B) Differentiated products give firms more market power, allowing them to charge higher prices.

31. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.
1) Why do firms advertise? D1 D1 D2
A) It helps differentiate their products from other firms.
B) Differentiated products give firms more market power, allowing them to charge higher prices.
2) Why Can They Charge More?
A) Demand increases since consumer tastes and brand loyalty are affected.
Remember, whenever demand increases, it means more output is being sold at a higher price.

32. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.
1) Why do firms advertise? D1 D2 D1
A) It helps differentiate their products from other firms.
B) Differentiated products give firms more market power, allowing them to charge higher prices.
2) Why Can They Charge More?
A) Demand increases since consumer tastes and brand loyalty are affected.
B) Demand also increases since the perceived utility of the item increases.
Remember, whenever demand increases, it means more output is being sold at a higher price.

33. Advertising
Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.
1) Why do firms advertise? D1 D3 D1
A) It helps differentiate their products from other firms.
B) Differentiated products give firms more market power, allowing them to charge higher prices.
2) Why Can They Charge More?
A) Demand increases since consumer tastes and brand loyalty are affected.
The D3 curve is the more inelastic demand curve on the graph.
B) Demand also increases since the perceived utility of the item increases.
C) Differentiated products are relatively more inelastic.
Notice how the higher price on D3 has the caused the firm not to lose as many customers as on D1.

34. Branding
Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.

35. Branding
Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.
1) It provides quality assurance.
A) Consumers are willing to pay for a brand name for its quality.
Consumers are often willing to spend more on a pricey brand name television simply because of its reputation for quality.

36. Branding
Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.
1) It provides quality assurance.
A) Consumers are willing to pay for a brand name for its quality.
B) If a brand name fails in its quality, it will be punished by the market.
When the E. coli bacteria was found in some Jack-in-the-Box hamburger meat in 1993, its sales and stock plummeted.

37. Branding
Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.
1) It provides quality assurance.
A) Consumers are willing to pay for a brand name for its quality.
B) If a brand name fails in its quality, it will be punished by the market.
2) It provides information.
A) Especially in new situations, consumers turn to known brands.
Imagine you are in an unfamiliar town and need a hotel for the night. You are much more likely to stay at a brand name hotel even if it costs more.

38. Branding
Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.
1) It provides quality assurance.
A) Consumers are willing to pay for a brand name for its quality.
B) If a brand name fails in its quality, it will be punished by the market.
2) It provides information.
A) Especially in new situations, consumers turn to known brands.
B) Consumers are more likely to purchase new products if it has a familiar brand name.
Suppose you have a favorite shampoo brand. If you are in need of face wash, hand lotion, or sunscreen, you may use the same brand.

39. Product Differentiation
OVERVIEW
Many of the products we buy come from monopolistically competitive markets. The firms in these markets can increase their market power, which equates to more revenue, by differentiating their products from their competitors’ products. Firms can do this in three different ways: by style or type; by location; or by quality.
DIRECTIONS
You need one set of “Product Differentiation Cards” and a “Product Differentiation Dice.” Spread the cards out on your desk face down (like Go Fish). One group member rolls the die and picks one card. The cards have monopolistically competitive markets listed on them. Whatever is rolled on the die tells you how to differentiate the market you drew. Write your answers in the table. All group members take turns.
These are the directions for the Class Activity that is included in the download. Refer to the lesson plan for more information.

40. “Monopolistic Competition” Targets
Knowledge 5 Understand the definition and characteristics of a market that is in monopolistic competition.
Reasoning 8 Explain why monopolistic competition often leads to product differentiation, advertising, and branding.

41. Resources