JC Economics Essay Monopolistic Competition & Profit Maximisation Model Answers
How many of you fear the test question on Monopolistic Competition and / or Oligopoly in the Market Structures topic question in your “A” Levels H2 Economics? For JC1 Econs pupils, this is even worse, as often you have to attempt the question essay question in your Promos exams. The content is already tough enough, the exam skills is even more demanding for Market Structures. Worst if it is set as a compulsory section on its own…
Furthermore, the oligopolistically competitive firm and the structure of Monopolistic Competition are tested together, as shown in the following sample question. So let’s master some content right now, as well as build your exam techniques!
Question
In the real world, most firms are either monopolistically competitive or oligopolistically competitive in nature.
(a) Explain why firms are most commonly found in the above two types of market structures.
(B) Discuss in reality, how a firm in monopolistic competition maximises profit in the long run.
JC Economics Essay – Monopolistically Competitive Firm
Introduction
Explain reasons why MC and oligopoly market structures are more realistic and hence more common. Monopolistic competitive (MoC) market structure: many small firms in the industry each selling differentiated product Low barriers to entry, eg low initial set-up costs, no specialized knowledge or technology needed to produce goods. Eg. Hawker stalls, hair saloons etc. Firms in MC market cater to the different needs of consumers by providing varieties.
They tend to provide individualised services and have limited scope for EOS. Thus, they have less incentive to be large (low MES). Firms in MC market behave independently of each other and there is no rival consciousness among the firms as each firm caters to its own group of customers with differentiated goods. Therefore, easier for firms to enter the industry leading to many small firms in the industry.
JC Economics Essay – Oligopolistic Competition
Oligopoly market structure: a few large firms dominating the industry . High barriers to entry, for example, high initial set-up cost needed for new firms to enter the telecommunication, transportation or airline industries. High initial set-up costs increase the risks and reduce the potential entry of new firms. Eg Pharmaceutical, petrol industries, etc. There is substantial EOS to be reaped so firms tend to grow in size to reap these cost advantages. Globalisation leads to more intense competition in the global market and this forced firms to be more competitive and innovative in order to survive. Thus, firms have to be larger to increase their competitiveness in the global market.
Therefore, the high barriers to entry lead to a few large firms dominating the industry.
Marking Scheme:
L1 (1-4m): Answer is generally vague and irrelevant or without economic analysis
L2 (5-6m): Answer is able to explain 2-3 factors for the predominance of firms in 4-7 the two market structures but lacking in good analysis and examples
L3 (7-10m): Thorough analysis of factors which account for the predominance of firms in the two market structures with the use of examples.
JC Economics Essay – Monopolistic Competition & Profit Max
part B response outline:
Thesis: How a mono comp firm maximises profit in the Short Run.
(sketch the diagram, making supernormal profits in the SR)
Explain the condition of profit maximization: MR = MC, in the diagram.
Anti-thesis: Thesis: How a mono comp firm maximises profit in the Long Run.
(sketch the diagram, making supernormal profits in the SR, transiting from the SR)
EV: evaluate the concept of MR=MC .
Conclusion: MoC firm earns only normal profit in the LR when attempting to max profits. In reality, difficult to achieve this outcome as estimations of MR and MC are difficult in practice.