Imperfect Imperfect competitioncompetitionImperfect Imperfect

competitioncompetition

Chapter 15Chapter 15

Imperfect Competition• Neither PC nor monopoly offer

consumers any choice. • Perfect competition is idealistic.• In PC goods are homogeneous but

in reality competitors set out to distinguish their products.

• There are substitute goods available for most goods.

• These goods are produced under conditions known as imperfect competition.

• Eg. Retail market for petrol in Ireland

• Even though goods are close subtitutes they are still unique.

• This is why imperfect competition is sometimes referred to as monopolistic competition.

Demand curve of a firm in imperfect competition

• Is downward sloping from left to right.• Because there are many close

substitutes.• If a firm increases price consumers

will switch to cheaper competitors.• Therefore inc price = less deamand.

Price

Quantity

P 1

P 2

Q 1 Q 2

D = AR

Assumptions for IC

1. There are many buyers in the industry

• An individual buyer, by his/her own actions cannot influence the market price of the goods.

• If one person decides not to buy the good it will make no difference to the price of the good.

2. There are many sellers in the industry.

• An individual seller can influence the quantity sold by the price it charges for it’s output.

• Products are unique but close substitutes.

• Increasing price, reduces amount sold.

• Decreasing price increases amount sold.

3. Freedom of entry and exit• It is possible for firms to enter and

leave the industry as they wish.• Firms already in the industry

cannot prevent new firms form entering.

• There are no barriers to entry or exit within the industry.

4. Profits• Each firm is aware of the profits

being earned by other firms.• Each firm tries to maximise profits.• This happens where MC = MR

5. Competition for the factors of production

• There is not a perfect elasticity of supply for the factors of production.

• If more firms enter the industry they will compete for the FOP.

• This will drive up costs.

6. Product differentiation• Unique goods• Firms persuade consumers to buy

their goods by making them slightly different.

• Branding• Establishing different and

distinctive brand names creates customer loyalty.

• Eg Nike, Addidas, Reebok…

• Competitive advertising• Creates differnces in the minds of

consumers.• Attemps to convince customers that

Brand X is better than Brand Y.• Packaging makes product

recognisable.Eg. Daz V Surf….

• Product innovation• Firms develop there product so it

is better or more advanced than competitors.

2005 Q 2 (c) (ii)• Effect of product differentiation on

the AR and MR curves

• AR downward sloping form left to right.

• As products are close substitutes.• If a firm lowers prices it can expect

to attract some new customers.• If a firm increases prices it may lose

some customres.

• If AR is falling then MR is also falling and lies below AR (maths).

• To encourage more customers the firm must drop prices.

• The AR curve is falling.• The revenue form the increased

sales will be reduced by the falling revenue on each unit previously sold at the higher price but now at a reduced price.

Advantages of IC• See book page

Disadvantages of IC• See book page

Imperfect Competition is wasteful because

• It does not produce at the lowest point on the AC curve.

• It engages in competitive advertising.• Large no. of small firms cannot

benefit from economies of scale.• Cost of the FOP increase as the no. of

suppliers increase.

Types of Advertising1. Informative• Is factual.• It supplies information.• Used by the government.• Eg. Drink driving

                   Website for this imageinfo-wars.org

•Full-size image

- Same sizex largerThis image mae subject to copyright.

2. Persuasive• Used to sell non essential/luxury

items.• No reference to competitors.• Eg. Hair products.

• Because your worth it!

3. Competitive Advertising• Used when there is a large

number of similar products on the market.

• Eg. Fairy last twice as long as the next leading brand!

4. Generic Advertising• Promotes the product rather than

the brand.• Eg. Drink milk it is good for you!

                   Website for this imagethefreshmilkclub.ie

•Full-size image - Same sizex largerThis image may be subject to copyright.

Exam Questions (HL)Short• 2008 Q 8

Long• 2009 Q 2• 2007 Q 2• 2005 Q 2• 2001 Q 1

Exam Questions (OL)Short• 2008 Q 5 p106• 2002 Q 4 p156

Long• 2006 Q 1 p 126• 2004 Q 1 p142• 2002 Q 1 p 158• 1998 Q 1 p 182