Overview
This lecture introduces the market structures of monopolistic competition and oligopoly, focusing on the features and demand characteristics of monopolistic competition.
Market Structures Review
- Perfect competition features identical products and maximum competition.
- Monopoly is the opposite extreme, with one firm selling a unique product with no close substitutes.
- Monopolistic competition and oligopoly are between perfect competition and monopoly.
Monopolistic Competition Characteristics
- Firms sell similar but differentiated products; products are not identical.
- Examples include restaurants, clothing stores, and gas stations.
- Differentiation can be due to physical attributes, location, quality, or intangible factors like reputation.
- There are low barriers to entry, allowing for competitive markets.
- Consumers have preferences for specific firms due to product differences.
Demand Curve in Monopolistic Competition
- Unlike perfect competition, the demand curve is not horizontal because products are differentiated.
- Firms in monopolistic competition are not price takers; raising prices will lose some, but not all, customers.
- Demand curve is downward sloping and more elastic (responsive to price changes) than a monopoly.
- Elasticity is higher because more close substitutes are available.
- In perfect competition, raising price above market level results in zero sales; in monopoly, fewer substitutes mean less sensitivity; in monopolistic competition, more substitutes increase sensitivity.
Key Terms & Definitions
- Monopolistic competition — Market with many firms selling differentiated but similar products and low barriers to entry.
- Differentiated products — Products that are similar but have differences in features, quality, or branding.
- Elasticity — The responsiveness of quantity demanded to changes in price.
- Demand curve — A graph showing the relationship between the price of a product and the quantity demanded.
Action Items / Next Steps
- Review how a firm in monopolistic competition maximizes profits.
- Prepare for discussion on profit maximization in monopolistic competition in the next lecture or video.