Econ12 - 8:00
Dixieland: Monopolistic Competition
Many, many years ago, my Great - Great Grandmother Polly visited a far away place called Dixieland. It was the most beautiful land she had ever seen. Dixieland was always sunny and everyone always had a smile on their face. Polly loved everything about this land: the people, the shops, the animals, and most importantly the food. There were three bakeries in Dixieland and each one of them was just as scrumptious as the others. They sold everything from breads to cookies to cakes. But out of the three, Billy’s Bakery was Polly’s favorite.
Billy Berman, the owner of Billy’s Bakery was a kind old man who had been running his bakery for as long as anyone could remember. Everyone loved this wonderful bakery; however, the prices of the products were abnormally high. Billy thought that his very delicious goods were worth every penny he sold them for, and if he were to ask for a lower price then it would be an insult to his company. This mindset of Billy’s only led to a bad economic standing.
On the other hand, the other two bakeries: “Dixieland Bakery” and “Susan’s Bakery” were very prosperous. Even though all three bakeries sold basically the same goods, Billy’s Bakery just wasn’t making as much money as it should. The main cause of this problem was the pricing on the products. Overall, Dixieland Bakery and Susan’s Bakery sold their products at a much lower price. This resulted in a loss of customers for Billy.
On this one particular day when my Great - Great Grandmother went to visit Dixieland she saw that the only person who was not smiling in the whole land was her dear old friend Billy. “Oh Polly,” he said sadly. “I might have to close my bakery if I don’t find a way to bring back my customers. I am losing too much business and I am not gaining any money“. Polly replied, “I am so sorry to hear that Billy. I love your bakery!” “Do you have any ideas that could help me attract more customers?” Billy asked hesitantly. At this plead, my Great - Great Grandmother Polly proceeded to give her very knowledgeable economic advice.
Polly told Billy that he was definitely part of a monopolistic competition. She told him that in this situation he faces a downward sloping demand curve and what he had to do was to choose a quantity where the marginal revenue will equal the marginal cost. In other words, no matter how much Billy thought that lowering the price would insult his company, he had to match the marginal cost. He has to choose his quantity and price like a monopoly does. But at all times, unlike the quantity, Billy must keep his price above marginal cost. Since it is a competitive market, he should also keep his price equal to the average total cost.
Since Billy was opposed to changing his price at first, my wise Great - Great Grandmother gave him another option. This second option was to do more advertising for his company. If Billy could get at least two different types of advertisement out into the public than he should be able to gain back his customers. Through advertising Billy will be able to tell more people about his magnificent bakery, which would draw more citizens and travelers to go to his bakery.
After all of this advice, Billy decided to make a few changes. Luckily to say, his changes were made for the better and he became very successful and even opened up another bakery in two towns over. My Great - Great Grandmother Polly goes to visit Billy and his bakery every year. This year I have the opportunity of joining her. I always see the ads for Billy’s Bakery on television, and now I finally get to see what it is all like. I can’t wait!