Characteristics of Monopolistic Competition - Video Tutorials & Practice Problems

Characteristics of Monopolistic Competition

All right, now, let's move on to our next market structure. Monopolistic competition. This unit is great because it gives us a more realistic depiction of competition in the real world. So, firms you deal with on the day to day, they're usually in a monopolistic lee competitive market. Let's check it out. So, we're gonna say that a markets monopolistic lee competitive first, when the goods for sale are similar, Similar, but not identical. Okay, not identical. Remember when we were talking about perfect competition, everybody's product was the same, right? You couldn't tell one farmer's wheat from another farmer's wheat. We'll hear the products are gonna be said to be differentiated. Okay, differentiated. That just means similar, but not identical. Okay, so if you think about a coffee from Starbucks, right, you might get this premium coffee frappuccino or something. But then there's other options for coffee, right? You can go to a convenience store, you can go to a little bakery, you go other places to get coffee as well, Right? But Starbucks has its differentiated product, right? It's special coffee and that's what drives its business. Right. Cool. So, we're gonna say that the sellers in these markets that are monopolistic lee competitive, the sellers are price makers to an extent. Okay. Notice, to an extent. Here, um when we talked about perfect competition, right, they couldn't they couldn't pick their price. The price was set by the market based on the supply and demand. And then all the individual firms had to sell at that price. Well here, they're gonna have some influence over the price, Right? Because what we're gonna see is that there's only gonna be one producer of the differentiated good. Right? So if you think of something like Mcdonald's and burger king, right? Burger king makes their whopper, right? And they have their whopper. Mcdonald's has their Big Mac. They're differentiated. They're both hamburgers, but they each have something special about them, right? Whatever that might be. Well, burger king is the only one producing whoppers, Right? So they have some influence over the price of a whopper. They might have fans who specifically like a whopper and don't like Big Macs or don't like any other burger. Their favorite burgers, a whopper, Right? So they're gonna have some influence there. But there are gonna be many producers of similar products. Right? So there's gonna be Mcdonald's with their Big Mac. There's Wendy's but then there's all sorts of other stores, right? That also are producing hamburgers as well. You can go to a restaurant and get a nice hamburger, something like that. But then on top of that there's other which could be called substitute goods as well, even like going to a pizza hut or something like that. And getting a pizza could even be considered a substitute for a whopper, right? Or going and getting um you know, any other fast food, right? It doesn't have to be a hamburger to be a substitute for this Good. Right? Imagine you're in a food court and you're the only company that has chinese food, Right? Those little bourbon chicken samples you get in the food court all the time. Well, you're the only company that has a chinese food store, but you're in a food court with tons of other stores, right? Selling hamburgers, selling pizza, selling everything else. Well, you're gonna have some influence right over what price you can charge. But you also have to stay competitive with the pizza and everything else, Right? You might the pizza and the hamburger place might offer meals for seven if you try to sell your chinese food for $15 right? A lot of people might say, well, I can get a meal right next door for seven. So it doesn't have to be chinese food to be in direct competition with you. Right? Just other similar products in this case, other food products. Cool. So, what we're gonna say is that in different, Excuse me, A monopolistic competition. We're gonna have some market power. Okay, and let me scroll down a little bit here. So market power, it's gonna be the ability of one person or a group to have influence over the price. Okay, So they're gonna have some market power when we talk about monopolies. Well, monopolies is a situation where there's only one producer for the whole demand. You can imagine if there's only one producer for all the demand for a product. They're gonna have some influence over the price, Right? They're gonna have a lot of market power in the monopoly. Well, here, since you have, you're the only producer of this differentiated good, you're gonna have a little bit of market power, right? You're gonna have some influence over your price because of your good being special and unique in that sense, right, differentiated at least. Okay. So what we're going to see also another defining factor here is that firms can still freely enter and exit the market. Okay. So remember in perfect competition firms, if you wanted to start a wheat farm, you just gotta get a farm and start growing wheat, right? Nothing is stopping you. Same thing here. You want to open a fast food restaurant or something like that. Well, all you gotta do is right into space, right, Start cooking some burgers and you're in the fast food business so you can freely enter and exit this business. It's not, there's no what we call barriers to entry. Like we'll see in a monopoly or something like that. So there's nothing a barrier to entry would be something blocking you write a barrier to entry into the market. So here, firms can freely enter and exit. Cool. So let's wrap up this video with an example, the things we've been talking about, right? So fast food is a great example of monopolistic competition. And another good one. Well, we mentioned, uh, the coffee market, right Starbucks versus a convenience store versus bakeries versus other places that have coffee as well, right? So there's gonna be differentiated products for this coffee? Not all the coffee is gonna be the same, right? Maybe we get our beans somewhere else. Whatever it is, there's gonna be some differentiation there. Okay, So that's the key here. The products are differentiated, and since they're differentiated, you get some influence over the price. Alright, So, in the next video, let's discuss what the demand curves look like for a firm in monopolistic competition. Alright, let's do that now.

Monopolistic Competition Demand Curve

All right, now, let's go ahead and compare the demand curves in monopolistic competition and perfect competition. Alright, so, on the left, we've got monopolistic competition. This will be something like, let's say that BK whopper right? Compared to on the right, something like we like we've been talking about, right? We something perfectly competitive like that. Okay, So let's think about what's happening here. On the left, we have a downward sloping demand curve, right? This is like what we saw when we first started learning about demand, write a downward sloping demand curve. So what does this entail for the company? That means, let's say if burger king is selling say this many whoppers right now, at this price, right? There's this demand and they find that at this price P one they sell Q one whoppers, right? Well, if they wanted to increase that quantity of whoppers right, if they wanted to increase the output, say to somewhere around here to Q two, well, they would have to lower their price. Right? What? We're gonna see the demand curve here is we've got a lower price, right? And this goes with the law of demand, right? The opposite where the price goes up, quantity goes down, the price goes down, quantity goes up, right? So, we've got the downward sloping demand curve here, compared to what we had in perfect competition on the right, we've got that flat demand curve, right. Remember in perfect competition. The price was set by the market, right? We have a market supply and a market demand doing our X. And at that equilibrium point, right? That is the price that the firms have to sell at, right, that's gonna be p star the equilibrium on the market. But at that time price the individual firm can produce as much as it want, right? As much as it wants because their portion of the entire market is so minimal. Right? We could say there's like two billion bales of hay bales of wheat being made every Every year and each firm is making say like 10,000 or something, something really small compared to the huge uh total demand. Right? So what does that mean? They can produce this quantity right here and sell it all at that price, right? Or this quantity here and sell it all at the equilibrium price or here. Right? Any quantity they want. It's not going to affect the price. But for monopolistic competition it does affect the price. Right? If they're going to increase the quantity that price is gonna go down because of the downward sloping demand curve. So let's go down here and let's summarize this information, right? The demand curve in monopolistic competition we just saw is downward sloping, right, downward sloping compared to perfect competition. Where we have a horizontal demand curve. Right? It's horizontal. Um And that is perfectly elastic. Remember perfectly elastic. That's when we're flat like this we're laying down, we're so elastic and sleepy. Right, perfectly elastic horizontal demand curve. Okay. And what did we see when we increase output uh in monopolistic monopolistic competition? Well, we have to lower our price, right? However, in perfect competition, we saw that we can keep the same price when we increase our output. Okay, So this decrease in the price that we're seeing in monopolistic competition. This is going to have effects on our marginal revenue. Right? If we want to sell one more unit, well, we can't sell it at the same price anymore. Right? That one more unit is gonna be a the lower price. So that's gonna affect our marginal revenue. When we talked about marginal revenue and perfect competition. Well, it's always the same, right? You want to sell one more unit of, hey, Well, it's going to sell at the market price. It's always going to be market price. It's not going to keep going down. Like we see with the downward sloping demand, Right? So monopoly, Excuse me, in perfect competition, we saw this relationship right here where the price equaled the average revenue, which is always true, but it also equaled the marginal revenue. Okay, We don't have that relationship in monopolistic competition. We still have price equal average revenue because that's always the case, right? And that price equals average revenue. That is our demand curve. Okay, But we're going to have a separate curve for marginal revenue. Okay, So we're gonna see how we do that in a second. Let's go ahead and move on to the next video Now