Application of Macroeconomic model

Application of Macroeconomic model

Introduction

The purpose of this study is to expand the boundaries of the author's knowledge by exploring some relevant facts related to Macroeconomic Theory and its applications. In many industries, consumers do not view products of different firms as perfectly homogeneous—that is, products are differentiated. Sellers differentiate their products in many ways, including physical characteristics, location of stores, service, and warranties. Sellers also try to create subjective image differences, persuading consumers that their brand of shampoo, toothpaste, or laundry detergent is different from (and better than) other brands. A consumer chooses Herbal Essences shampoo instead of Dove or Pantene partly based on color, scent, packaging, and image (correct or incorrect) about how the shampoo will work. Because of product differentiation, some consumers will pay more for Herbal Essences shampoo.

Discussion & Analysis

Monopolistic Competition

Procter & Gamble, through its Clairol division, is the sole producer of Herbal Essences, giving it some monopoly power. This implies that the demand curve for Herbal Essences is downward sloping, in contrast to the perfectly horizontal demand curve faced by a seller in a perfectly competitive market. But the market power of a monopolistically competitive firm is limited because there are many producers of similar products. While a consumer might pay $0.50 or $1.00 more for a bottle of Herbal Essences, she is unlikely to pay $5.00 more. Thus, the downward-sloping demand curve for Herbal Essences is relatively elastic (Pindyck, 2009).

A monopoly is the only producer of a good for which there are no close substitutes. This puts the monopolist in a unique position: It can raise its price without losing consumers to competitors charging a lower price. Thus, the monopolist is the industry and faces the downward-sloping market demand curve for its product. The monopolist can choose any point along that demand ...