Question

1. For the beauty market- Beauty Salon
   1. How would you characterize its costs. For example:
      1. Large or small fixed costs?
      2. Large or small marginal costs relative to fixed costs?
      3. Given your answers would you expect sells to be large and few of them or small and many of them.
   2. Does this market fulfill each of the requirements for perfect competition?
      1. I doubt any market you choose will meet all of them.
   3. How would you characterize the market if it’s not competitive?

Answer 1

Ans) 1) Salon does not have any significant fixed cost. That is, their fixed cost is small.

2) Marginal cost is the cost of producing one additional unit. Now salon provide the services like pedicure, manicure, haircut etc. So, they have small marginal cost. As cost of one additional haircut or any other services will be quite small.

3) There will be many small sellers in the market. You can say that by your real life experience too !

4) Perfect competition is where there are many sellers selling homogeneous products. There are no barriers to entry and exit. Sellers are price takers.

Now, salon fulfils two criterion i.e many small sellers and no barrier to entry and exit. But salons sell homogeneous but differentiated products. That is, different sellers offer at least some differentiation in their services. This enables them to charge differently i.e firms are not price takers.

Therefore, salon does not fulfill all the criterion of Perfectly competitive market.

5) Salon operate in monopolistic competition, where there are many sellers selling homogeneous but differentiated products. There are no barriers to entry and exit. Firms are not price takers.

Other examples of monopolistic competition are÷ restaurants, clothing and cosmetic industry etc.