Monopolistic Competition

As we know, COLGATE is the popular toothpaste brand in the world.

Do you know the market structure for the toothpaste industry falls under monopolistic competition?

Because:
(1)  it characterized by a relatively large number of sellers
(2)  has differentiated products and has many close substitutes
(3)  it is freedom to entry and exit from the industry

With numerous firms in an industry, there are many brands of toothpaste in the market. For example: DARLIE, SENSODYNE, AQUAFRESH, CREST and others. Each of the firms produce similar but slightly different product. The toothpaste industry turns out variation of product which is differentiated by texture, flavour, services, promotion, product attribute, brand names and packaging.

Since there are many firms in an monopolistic competition industry, firms will utitlise promotional tools such as advertisments to encourage and influence people to purchase their product. For example, COLGATE company are doing some promotion to attract more customer to seek the maximize profit. They are trying to create some clever advertisements for example, COLGATE has targeting in children and adult and put in effort to promote better children’s   oral hygiene and dental care.

The COLGATE is only the small part of total industry in monopolistic competition. Therefore, COLGATE brand firm has limited power to control over the market price of total industry. If the price of toothpaste rise, will results consumers switching to other brand. Although in monopolistic competition, there is price maker but the Colgate firm cannot set the price too higher, because other people can’t afford the cost of goods with higher price.

  

     

Unlike monopolists and oligopolists, firms in monopolistic can’t maintain excess profit because consumers still have many substitutes to choose.

**Due to easy entry and exit from the industry, so the firms make only normal profit in long-run.

**To understand the characteristic of monopolistic competition more clearly, 

you can watch this following video:

Resources: http://top7.com/top/1344/Toothpaste-Brands

                       https://www.youtube.com/watch?v=T3F1Vt3IyNc

Written by: Joanne Teng Zhen Hui                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Price Ceiling & Price Floor

Price Ceiling of Sugar

A price ceiling is set below equilibrium price

 The price of sugar must be set under the price ceiling which means government has set a regulation that the price of sugar is not allowed to rise above a certain level. As the original market price of sugar is too high and this will cause poor people cannot afford to buy sugar. So, government has to control the charges that sellers pass to consumers to protect consumers.

For instance, government had set the price ceiling of sugar as RM2.84 per kg. Sellers are prescribed that they can charge consumers at the price between RM2.50 to RM2.84 per kg, but cannot charge above RM2.84 per kg.  

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Price Floor of Wheat

A price floor is a minimum allowable price set above the equilibrium price.

The price of wheat must be set above price floor as government found that consumers able to purchase wheat is less than producers offer it. If the price of wheat is set at equilibrium price, producers will not gain profit and will lose. Thus, government sets price floor is to help producers gain profit and protect them.

Written By

Jescy Seah Jec Xi

Gross Domestic Product (GDP)

What is Gross Domestic Product ? Gross Domestic Product (GDP) is the total income earned by all sectors in the economics within a country. It also known as national output because we believe that the total income that a country gets is derived from the total output produced in the country. National output includes goods and services produced by citizen-supplied and foreign-supplied resources in a country. How to calculate Gross Domestic Product? There are three ways to determine Gross Domestic Product which are expenditure approach, output approach and income approach. These three methods give the same result of Gross Domestic Product.

Let compare the Gross Domestic Product of Malaysia between the year 2011 and the year 2012. According to the data from World Bank, the Gross Domestic Product of Malaysia in the year 2011 and year 2012 are US $ 287.934 billions and US $ 303.526 billions respectively. This shows that there is a difference of US $ 15.592 billions. We can assume that the goods and services produced in the year 2012 have increased significantly and the amount of net export has increased. The increase in Gross Domestic Product is a good trend for Malaysia because Malaysia gets more national income in the year 2012 compare to the year 2011. Thus, Malaysia can spend more in the year 2012.

Reference :

Table of Gross Domestic Product of Malaysia

http://databank.worldbank.org/data/views/reports/tableview.aspx

Chart of Gross Domestic Product of Malaysia

http://databank.worldbank.org/data/views/reports/chart.aspx

Wrote by

Yap Yeow Phing

How elasticity apply to the firms???

Luxuries companies such as GUCCI, LV, CHANEL and Burberry are competing and elastic demand is the way to evaluate their profits. Firms can increases the quantity demanded on their product by lowering the price. Example, if price of branded product (GUCCI) drops, the quantity demanded will increase. Inelastic demand occurs in goods and consumers will not pay attention on price even there is changes in price so firms can increase the price such as, Yeos, Pringles and Maggi.  Because of many companies are selling different goods, firm can’t exceeds the limit price. Unit elastic demand and perfectly inelastic demand are the aim for companies to get the highest profits and revenues from customers but this situation have obstacles due to competitors rising. Due to improvement in operating system from Apple and Samsung companies, Nokia, Sony Ericson and Motorola companies met perfectly elastic demand which recession occurs.

All daily newspapers in the United States between 1970 and 1975 and it shows that results the demand curve is consider a highly inelastic demand. During the six-year period studied indicated that there is a 50% increase in price  and only a 1.25% decrease in circulation. This means that if price of newspapers changes from 15 cent to 20 cents, the quantity demanded is considered as the same.

Written by

Elbin Wong Tze Bin

Factors Other Than $$$ Which Affects Demand

People know that price of the good itself is the main factor that affects the quantity of demand. However, there are actually other factors which would affect quantity of demand too.

First, we could think about level of income. Example, normally Mr Lee‘s monthly salary is RM 2,500, if his salary had been increase to RM 3,500 per month, his demand of buying particular goods will increase too.

Besides that, the price of a related good, such as Substitute good will affects the quantity of demand too. A substitute good is a replacement good for one similar product. When the price of one good increases, demand for the substitute will increases. Example, when the price of Coke increase, customers will tend to buy Pepsi as a substitute good, which increases the demand of Pepsi.

According to Boundless.com, different customer’s taste lead to increased or decreased demand, which is one factor that economists consider when looking at changes in demand. For example, since Ali would always choose Nokia, the demand of Nokia would always higher than HTC.

Lastly, consumer’s expectations about future prices are the last factor. For example, if the price of Proton expected to fall next month, the demand for Proton this month will fall because customer would wait for the price to fall next month.

Reference-

Boundless (n.d) Factors Shifting the Demand Curves, Changes in Preferences or Tastes. Available from: https://www.boundless.com/economics/principles-of-supply-demand/factors-shifting-the-demand-curves/changes-in-preferences-or-tastes/ [Accessed 9 July 2013]

Written By
Soh Khuan Ming

Ranges of Elasticity

Fairly Elastic Demand- Shows that a change in prices will leads to high quantity demanded obviously due to high responsiveness of consumers. This often occurs in luxuries and causes firms will get more profits and revenues

Fairly Inelastic demand- Shows that a change in prices will leads to change in quantity demanded but not really obvious changes due to low responsiveness of consumers. This often happens in goods and causes firms earn less profits and revenues.

Unit elastic demand- Shows that there is an equal between the change in prices and the change in quantity demanded due to no any responsiveness to consumers and the consumerisation still goes on.

Perfectly elastic demand –Shows that the increase in prices will cause the quantity demanded is zero due to buyers have fully responsiveness to the price changes. Recession occurs to the firm.

Perfectly Inelastic Demand- Shows that  when there is a change in the prices, it will not affects the change in quantity demanded due to no responsiveness to consumers.

Written By 

Elbin Wong Tze Bin