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Lahore Garrison University

Microeconomics
Week-14 and 15
BBA Prepared by:

sidra Liaqat
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Instructor Contact Details

 Name: sidra Liaqat

 Course Instructor: Micro economics
 Credit Hours: 3
 Designation : lecturer
 Office Location: Office # 4, 1nd Floor, Doctor’s Block, LGU
 Email: sidraliaqat@lgu.edu.pk
 Visiting Hours: Tuesday 11:00 – 12:30 & Friday (9:00 to 10:30)

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Course Objectives

 Microeconomics students learn how and why individuals make certain financial decisions.

... While macroeconomics focuses on governmental policies and big-
picture economic implications, microeconomics classes involve the study of resource
decisions at individual and business levels.

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Preamble (Past Lesson Brief)

 What comes to your mind about oligopoly?

 What is the main assumption of oligoploy?

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Learning outcome:

 Explain what economics is and explain why it is important

 Explain how economists use economic models
 Use mathematics in common economic applications
 Use graphs in common economic applications

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Are you ready?

 Share if you have general underdoing word micro economics?

 Do you have general underdoing word micro economics?
 What comes to your mind by a common word economics?

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Monopolistic Competition

 Types of Imperfectly Competitive Markets

 Monopolistic Competition
 Many firms selling products that are similar but not identical.
 Oligopoly
 Only a few sellers, each offering a similar or identical product
to the others.

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Monopolistic Competition

Markets that have some features of competition and some features of monopoly.
 Many sellers
 Product differentiation
 Free entry and exit

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Monopolistic versus Perfect Competition

 There are two noteworthy differences between monopolistic and

perfect competition—excess capacity and markup.
 Excess Capacity
 There is no excess capacity in perfect competition in the long run.
 Free entry results in competitive firms producing at the point where
average total cost is minimized, which is the efficient scale of the
firm.

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Excess Capacity

 There is excess capacity in monopolistic competition in the long run.

 In monopolistic competition, output is less than the efficient scale of perfect competition.

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Markup Over Marginal Cost

 For a competitive firm, price equals marginal cost.

 For a monopolistically competitive firm, price exceeds marginal cost.
 Because price exceeds marginal cost, an extra unit sold at the posted price means more profit for
the monopolistically competitive firm.

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Advertising

When firms sell differentiated products and charge prices above marginal cost, each firm has
an incentive to advertise in order to attract more buyers to its particular product.

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Conti…

 Firms that sell highly differentiated consumer goods typically spend between 10 and 20
percent of revenue on advertising.
 Overall, about 2 percent of total revenue, or over $100 billion a year, is spent on
advertising.

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Conti..

 Critics of advertising argue that firms advertise in order to manipulate people’s

tastes.
 They also argue that it impedes competition by implying that products are more
different than they truly are.

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Conti…

 Defenders argue that advertising provides information to

consumers
 They also argue that advertising increases competition by offering a
greater variety of products and prices.
 The willingness of a firm to spend advertising dollars can be a
signal to consumers about the quality of the product being offered.

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Challenging Exercise:

 Take a look at every day life activities and note how these activities are explaining the
scope of economics.
 Make a list of ten things where you could found any of the learned concept being
applicable.

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What did you learn?

 What is meant by monopolistic competition?

 What is the difference between oligopoly and monopolistic competition ?

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Home Assignment:

 Search the types of monopolistic competition.

 Search the applications monopolistic competition.

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References:

1. Principal of Economics by N. Gregory Mankiw, 6th Edition.

2. Essentials of Microeconomics by Krister Ahlster.
3. Microeconomics by R.S.Pindyck, D.L.Rubinfeld, 7th Edition
4. Microeconomic Theory: Basic Principles by Walter Nicholson, 11 th Edition

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