hi everybody welcome so this is our virtual lecture for chapter 10 monopolistic competition and oligopoly so we have covered our first two market structures in this class perfect competition that was chapter eight that was the most competitive market structure possible remember we had identical firms producing identical products and uh so that created the utmost competition then went to the other extreme which was monopoly which was a single firm selling a unique object without any close substitutes in between those two extremes are these two market structures monopolistic competition and oligopoly so we're going to go through those two in this chapter so first monopolistic competition okay so monopolistic competition is a market that's highly competitive but unlike perfect competition products in this market are different they're differentiated they're going to be similar we're going to talk because that's what we mean by a market right they're selling a product that's relatively similar to one another but not identical think clothing stores think restaurants think grocery stores so like think about restaurants you go to you can have a you know a city that has two mexican restaurants that are close to one another um but are they identical no right even mexican restaurants which have which might have similar menus and might have the same items for all we know we wouldn't call those identical right because there are differences there's differences in the taste there's differences in the type of quality of food even if the menu items are very similar so the next thing about monopolistic competition is it's going to have low barriers to entry so like perfect competition the monopolistic competition is going to be competitive okay so to be competitive we're going to have bear we're not going to have the barriers to entry that are keeping competition away okay so differentiated products what we mean by differentiate is they can be similar they're in the same market but they're different in one or more aspects so it could be the physical apps aspects like the taste or quality of the food food it could just be the location it sold right so even if two firms are selling almost identical goods something like gas stations could be monopolistic competition if gas stations are selling you know unleaded gasoline if one is right next to the freeway and one is not you might have a preference for one over the other that's really going to be the key difference between perfect competition and monopolistic competition is in perfect competition things were identical so there was no preference no one was going to care whose wheat they had but when monopolistic competition you're gonna have reasons to prefer one firm over another so physical aspects could be the taste the quality location intangibles intangible aspects could be you know this is this um firm does good for the community or something like that perception of the product it could be just the way you feel about a product even if you don't necessarily think one is better than the other um demand for a monopolistically competitive firm so remember the demand curve in perfect competition remember it was horizontal it was horizontal because firms were price takers remember they had no say over the market price if you charged a little bit higher in the market price you lost all of your business is that true in monopolistic competition maybe like delivery pizza is a good example of monopolistic competition okay they're all going to sell relatively similar prices right there's not a big difference between domino's and pizza hut in terms of prices if domino's raised its prices do you think they'd lose all their competition all the competition all the all the customers let's say they doubled their price every one of their customers you know if they double their price they probably lose a lot but every one of them i don't think so okay so that's not the case in monopolistic competition we're not gonna have a horizontal demand curve since products are differentiated and people have preferences if one mexican restaurant changes charges a higher price than the other mexican restaurant down the street it doesn't necessarily lose all its sales because some people might prefer that food okay so there are some people who are sensitive to price remember we've talked a lot about like elasticity in this course sensitivity price exists but that horizontal demand curve we saw in perfect competition meant not just sensitive it meant it was like a trigger mechanism if you charge a higher price you lose all of your customers that will not be the case in monopolistic competition because it required that identical product assumption to make that true and perfect competition we don't have that monopolistic competition in monopoly we had the monopolist facing the demand curve for the entire market that also won't be the case in monopolistic competition the market for mexican restaurants is the market for mexican restaurants and if one mexican restaurant has their own individual demand for their restaurant that's not the overall demand for mexican food okay that's different so when we draw it the way we're going to draw it is it's going to be a combination between of the two it's going to be downward sloping okay it's not going to be horizontal but unlike monopoly since it's not the entire market we are going to assume that the that compared to monopoly that the demand for monopolistic competition is more elastic okay remember elasti-means elasticity is the sensitivity of the quantity demand to price changes so a firm in a monopoly a monopoly firm is going to have relatively inelastic demand even though for uh customers may be turned off due to the price they're good because there's no close substitutes we think that there is going to be inelastic demand in general relatively it doesn't have to be super inelastic it does isn't necessarily even inelastic but just compared to monopolistic competition it'll be more inelastic because once you have more firms once you have more close substitutes remember the number one determinant of elasticity was the availability of close substitutes if there are close substitutes to your good your demand tends to be more elastic so just look at something like this this was the demand in perfect competition horizontal in monopoly it's downward sloping and so when we think of monopolistic competition we're going to think of it as being flatter more elastic less sensitive to price changes just just to like review what the shape of the demand curve means in case this is uh unclear to you let me just bring out my drawing tool real quick so let's say all of these let's say this is a price of like three dollars say this is a price of like three dollars right here and three dollars right here just gonna make it the same all the way across so i can't draw a dollar sign let me not just erase that and try again there we go there we go three dollars right here um and so in let's say this is the amount this firm was remember the amount the firm sells in perfect competition depends on the firm's marginal cost okay now just to show what the steepness the demand curve means let's let them all raise their price to the same amount let's say this is four dollars right here okay so we would say a firm and perfect competition if they try to raise their price from three dollars to four dollars they would sell zero units they're good because they're price takers because every other firm is selling for three dollars and they're identical products they're gonna lose all of their business a firm monopoly is gonna lose some business when they raise the price let's say this is i don't know looks like maybe 75. they're going to lose some business when they raise their prices because customers can be sensitive to price changes unless this is a necessity we would think that yeah people are going to say all right maybe you know if you raise your price that's that i'm no longer interested but look at the case here in perfect in monopolistic competition we're just saying that that is going to be much starker change um and hopefully that makes sense because there's other firms that can sell whatever it is that this monopolistically monopolistic competitor is selling okay so i am going to stop this video here because now that we have a primary novelist a competition is we are going to go into that how does a firm and monopolistic competition maximize profits sorry i lost my cursor there for a second