1. Tablet computing
How many buyers & how many sellers are there in this market? Give examples.
Approximately, what type of concentration ratio is there in this market?
How easy do you think it is for someone to enter & exit this market?
What type of knowledge do consumers have?
To what extent is there product differentiation or product branding? Give examples.
Do the companies have some control over the price? Are they price makers or takers? Give examples.
Is there evidence that they capable of making short term profits?

2. Watch PAJ Holden on MC…learn the diagram for next time!
HOMEWORK Questions
EITHER use The Economist article on Tablet computers OR
Think about a local area that you know well…
Choose one of the following ‘business areas’ and complete the Q’s opposite…
Local restaurants
Coffee shops
Hairdressers
Small-scale children’s nurseries
Independent hotels
Local Coach Companies
How many buyers & how many sellers are there in this market? Give examples.
Approximately, what type of concentration ratio is there in this market?
How easy do you think it is for someone to enter & exit this market?
What type of knowledge do consumers have?
To what extent is there product differentiation or product branding? Give examples.
Do the companies have some control over the price? Are they price makers or takers? Give examples.
Is there evidence that they capable of making short term profits?

3. Monopolistic Competition

4. Key characteristics of Monopolistic Competition
What’s the difference to PC?
There are many producers and many consumers in a market - the concentration ratio is low & they act independently.
The barriers to entry and exit into and out of the market are low
The firms are short run profit maximisers.
Consumers see that there are non-price differences among the competitors’ products i.e. there is product differentiation
Producers have some control over price - they are “price makers” rather than “price takers.”

5. Role of 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 market conditions

6. The diagrams!

7. Diagrams – your go Side by side
Draw the curve for profit maximisation under monopoly
Draw the curve for profit maximisation under PC
I’ll start you off…

8. The role of advertising in monopolistic competition
With abnormal profits and ‘no’ barriers to entry
Companies use significant advertising to encourage brand loyalty & customer
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

9. Dual effect The inward shift of the Demand curve
The outward shift of the MC curve
….. Will result in a Normal profit scenario

10. The effect of advertising Short run equilibrium under MC
Long run equilibrium under MC

11. Normal profit under monopolistic competition
At any other output ATC >AR, so the firm will make losses.

12. 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 sales.

13. Efficiencies

14. Productive efficiency
No – since Qm rather than Qo
There is a market shortage
They are also not maximising their economies of scale

15. Allocative efficiency?
No since Pm > MC
In a truly competitive market the Po would exist – so there is misuse of the consumer surplus
Consumers are over charged and firms produce under their capacity

16. Dynamic Efficiency 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 dynamically efficient.

17. Wasteful advertising? It can increase costs
The debate over the environmental impact of packaging is linked strongly to this aspect of monopolistic competition.

18. Plenary
Post-its
List 4 characteristics of MC
Draw the LR equilibrium