Tag Archives: monopolistic competition

Technological advance: invention, innovation, and diffusion.

31 Jul

technological advantage
       In economics technological advantage is new and better goods and services and new and better ways of producing or spreading them. This process occurs over a theoretical time called very long run, than can be as short as few weeks or as long as many years. Let’s recall that in all our market systems (pure competition, monopolistic competition, oligopoly and pure monopoly), the short run is a period in which technology, plant are fixed, however in the long run , technology is constant but the firms can change their plant size and are free to enter and exit the industry. In contrast, very long run is a period in which technology can change and firm can develop and supply totally new products.
   It’s known that technological advantage shifts product possibility curve upward, enabling economy to achieve more goods and more services. Technological advantage can be is made up of three parts: invention, innovation, and diffusion.
   The first step to technological advantage is invention: the discovery of product or process of producing by using imagination, thinking and experimenting. Invention is a process and the result of it is also called invention. Invention is based in scientific knowledge and it is the result of work of individuals who work on their own or as members of Research and Development (R&D) departments in firms. Government encourages invention by providing patents, right to sell any innovative process of production, machines or products in a set time.
Innovation is directly related to invention. While invention is “discovery and proof of workability”, innovation is the successful introduction of new product (invention) in the market, the first use of a new method of producing, or the creation of new form of business firm. There are two types of innovation: product innovation, improving products and services, and process innovation, which is improved ways of production and spreading of these inventions in the market.
In contrast to invention, innovations cannot be patented. Innovation needs not to weaken or destroy the existing firms. Because new products and processes threaten firms’ survival, existing firms have a high incentive to engage into research and development (R&D) process continuously. These innovative products and processes enable firm to earn higher revenue or to maintain the present ones. Innovation can strengthen or weaken market power.
   Diffusion is the process of spreading of inventions through imitating or copying. To take the advantage of new profits or to slow down disappearing of others, all firms try to implement the innovations. In most of the cases innovation leads to widespread imitation (that’s diffusion) of inventions. For example, soon after McDonald’s introduced the fast-food hamburger, Burger Kings also started to produce it, since it offered high revenues for the firms that supplied this good.
Research and Development (R&D) Expenditures
When it’s related to business research and development means the efforts towards inventions, innovations and diffusion. Many countries engage in R&D of national defense, so that annually they spend thousands of billions of dollars.
Importance of Technological Advantage
   Technological advances for many centuries were viewed ad external to economies, like a force to which economies adjust. Periodically new advances in scientific and technological knowledge occurred. Firms and industries, incorporated new technology into their products and production process to increase or to maintain their revenues. After making some adjustments, they continue to settle into long-run equilibrium position. Economists believe that technological advantage is related to advance of science, which is very important for market system. Some of economists see capitalism is the as driving force of technological advantage. Technological advantage arises from rivalry among individuals and firms that motivates them to seek and exploit new opportunities of profit and of expanding. This rivalry occurs between new firms and existing ones. Entrepreneurs and innovators are viewed as heart of technological advantage.


Monopolistic Competition

26 Jul

Monopolistic Competition
So, monopolistic competition is characterized by differentiated products (promoted by advertising), a relatively large number of seller, easy entry and exit from the industry.  First characteristic is an aspect of monopolistic industry, but second and third are an aspect pure completion industry. In general monopolistically competitive industries are more competitive then monopolistic.
 Differentiated Product
In this type of market system, in contrast to pure competitive one, products diverse, that’s why we say that monopolistic competition is described by product differentiation. So firms produce variations of a specific product.  They may change, for example, some physical characteristics, or they have different attitudes towards customers’ service, even may proclaim some qualities of the product that may be real or imaginary ones.
Product Characteristics
Products may have diverse physical or qualitative aspects. Real difference in design, functions, resources used as a raw materials or quality of work provides vital aspects for product differentiation. For example, car producers try to differentiate their products by offering cars with different aspects of engine power, safe system, and design to attract more buyers.

Service and conditions that characterize selling of the products are some kind of product differentiation too. For example, some shops’ directors may stress more on providing some environment-friendly bags and have a higher price of goods, but others may offer the service of their clerks who will carry your products to your car for free. Prestige of the firm, appeal of the products, and helpfulness of the clerks are examples of product differentiation.
Goods may also be differentiated by their accessibility and location. For example, some mini-markets may compete with super-markets, even if their offer small amount of products and charge higher prices for goods, because their location is very convenient for buyers. So a lot of firms in monopolistically competition industry compete on the basis of location.
Product differentiation can be made by using brand names, trademarks, and celebrity ads. For example, a lot of producers are supplying sugar, but consumer’s choice may be influenced by superiority of some firms (who are known to have higher quality than others, even if it is real or not). For example, when a celebrity’s name is related with some clothing stuff or shoes, buyers may be willing to increase their demand for that product.  Beautiful Packaging of some jewelry, natural water or gifts may attract additional costumers.

 Price control
Even if there are a lot of firms in monopolistic competitive industries, they may have some control over price, because of price differentiation. If the consumers love the products of a specific seller, then they may pay higher prices to satisfy willingness to by that good. So, sellers and demanders aren’t connected randomly, like in a competitive market. So, monopolistic competitors may have some control over price, but it is quite limited, since there are a lot of substitutes for the goods they produce.

Entry and Exit
Entry and exit into monopolistically competitive industries is relatively easier than in pure monopoly and oligopoly. Because monopolistic competitors are typically very small, then economies of scale and capital resources are small enough for new firms to entry. But there may be some financial barriers when these firms will develop and advertise their products from rival’s. Some firms may possess even patents or copyrights, so the entry in this kind of industry will be quite difficult.
However, exit from this kind of market system is very easy. Nothing prevents an unprofitable firm to shut-down their activity.

The product’s differentiation policy would be inefficient if the firm won’t be able to tell consumers about them. That’s why monopolistic competitors sometimes advertise their products heavily. So the goal is “non-price” competition which means that prices are a small factor in buyers’ purchases.

Four Market Systems (summary)

9 Jul

  Market System

  There are four models of market system: pure competition, pure monopoly, oligopoly, monopolistic competition.

Let’s describe them briefly:

  • Pure competition– is a market structure that is composed of a very big number of firms that produce a standardized product. Entry and exit from this type of market is very easy.
  • Pure monopoly- is a market structure in which one firm (or a very few ones) is single seller of a product or service. Entry to this kind of market system is blocked, so one firm can rule the entire industry. Monopolists produce unique product and there is not any reason to difference it, since there are not competitors.
  • Monopolistic Competition-is characterized by relatively large number of suppliers who produce differentiated products. There is nonprice competition (each firm is trying to distinguish its product or service by some characteristics like quality, price). Entry to monopolistically competitive industry is relatively easy.
  • Oligopoly- is made up of sellers with identical or similar products so that the change in price of one may affect future decisions of other firms.

Pure monopoly, oligopoly and monopolistic competition are considered as imperfect competition.

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