Objective: The goal of this activity is for IB Economics students to deepen their understanding and application of the concept of perfect competition. Utilizing the case study of Green Valley Farms, students will explore the intricacies of market structures, focusing on the transition from short-run to long-run scenarios in a perfectly competitive market.
Case Study: Imagine a bustling city with numerous cafes, each offering a unique blend of coffee and ambiance – a classic example of monopolistic competition. In this market, cafes like ‘Bean There’, ‘Espresso Yourself’, and ‘Latte Land’ differentiate themselves through branding, quality, location, and customer service. While the core product, coffee, remains relatively similar, these slight differences create customer loyalty and allow each café to have some control over its pricing.
Initially, ‘Bean There’ finds success with its unique blend of organic coffee and a cozy, book-themed interior, attracting a loyal customer base. In the short run, they enjoy supernormal profits due to their differentiation strategy.
However, seeing ‘Bean There’s’ success, other cafes begin to innovate, introducing their unique blends and themes. This influx of competition gradually reduces ‘Bean There’s’ market power and supernormal profits. In the long run, the market stabilizes; cafes still retain some loyal customers due to product differentiation, but the profits normalize.
Questions for Students
- Short-Run
Analysis: Draw a diagram representing ‘Bean There’s’ short-run
conditions in the market. Explain how product differentiation contributes
to their ability to earn supernormal profits.
- Long-Run
Market Dynamics: Illustrate and describe the long-run equilibrium for
‘Bean There’. How does increased competition affect their profits and
market position?
- Product
Differentiation and Demand Curve: Discuss how product differentiation
in monopolistic competition affects the elasticity of the demand curve for
‘Bean There’ and similar cafes.
- Efficiency
and Consumer Welfare: Evaluate the allocative and productive
efficiency in monopolistic competition. How does this market structure
impact consumer welfare, using the city café scene as an example?
- Comparison
with Perfect Competition: Contrast the outcomes and efficiencies of
monopolistic competition, as seen in the café market, with those of
perfect competition.