1. Imperfect competition Chapter 15

2. 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.

3. 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 Size:600 × 400 Type:44KB JPG Website for this image goodguide.com Full-size image - Same sizex largerFull-size image This Type: Type: 84KB JPG84KB JPG Website for this image oxygenfit.com.au Full-size image - Same sizex largerFull-size image This image may be subject to copyright.

4. Even though goods are close subtitutes they are still unique. This is why imperfect competition is sometimes referred to as monopolistic competition.

5. 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.

6. Price Quantity P 1 P 2 Q 1Q 2 D = AR

7. Assumptions for IC

8. 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.

9. 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.

10. Increasing price, reduces amount sold. Decreasing price increases amount sold.

11. 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.

12. 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

13. 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.

14. 6. Product differentiation Unique goods Firms persuade consumers to buy their goods by making them slightly different.

15. Branding Establishing different and distinctive brand names creates customer loyalty. Eg Nike, Addidas, Reebok…

16. 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….

17. Product innovation Firms develop there product so it is better or more advanced than competitors.

18. 2005 Q 2 (c) (ii) Effect of product differentiation on the AR and MR curves

19. 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.

20. If AR is falling then MR is also falling and lies below AR (maths). To encourage more customers the firm must drop prices.

21. 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.

22. Advantages of IC See book page

23. Disadvantages of IC See book page

24. 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.

25. Types of Advertising 1.Informative Is factual. It supplies information. Used by the government. Eg. Drink driving W e b si t e f o r t hi s i m a g e in fo - w ar s. or g F u l l - s i z e i m a g e - S a m e s i z e x l a r g e rF u l - s i z e i m a g e T h i s i m a g e m a e s u b j e c t t o c o p y r i g h t.

26. 2. Persuasive Used to sell non essential/luxury items. No reference to competitors. Eg. Hair products. Because your worth it! 616 × 440 616 × 440 Size: Size: 85KB JPG85KB JPG Type: Type: Website for this image hidiro.com Full-size image - Same sizex largerFull-size image This image may be subject to copyright.

28. 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!

29. 4. Generic Advertising Promotes the product rather than the brand. Eg. Drink milk it is good for you! Size: Size: 104 × 146 104 × 146 Type: Type: 8KB GIF8KB GIF Website for this image thefreshmilkclub.ie Full-size image - Same sizex largerFull-size image This image may be subject to copyright.

30. Exam Questions (HL) Short 2008 Q 8 Long 2009 Q 2 2007 Q 2 2005 Q 2 2001 Q 1

31. 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