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BBEK1103

PRINCIPLES OF MICROECONOMICS

Semester May 2019

MATRICULATION NO : 931214086088001

IDENTITY CARD NO. : 931214086088

TELEPHONE NO. : 012-9814932

E-MAIL : sarjitraj@yahoo.com

LEARNING CENTRE : KUALA SELANGOR

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Table of Content Pages

1.0 Introduction 3
1.1 Goods and Services Produced 3
1.2 Company Achievement 3

2.0 Characteristics of Monopolistic Market Structure 4

2.1 Quite a Large Number of Buyers and Sellers 4
2.2 Differentiated Products that are Close Substitutes 4
2.2.1 Services Quality 5
2.2.2 Latest Styling 5
2.2.3 Location Distribution 5
2.3 Freedom to Leave or Enter the Market 5
2.4 Price Control and Elastic Demand 6

3.0 Short Run Market Equilibrium 7

3.1 Supernormal Profit 8
3.2 Normal Profit 9
3.3 Subnormal Profit 10

4.0 Long Run Market Equilibrium 11

5.0 Conclusion 13

Reference List 14
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1.0 Introduction
The company that I have decided to choose is Kimarie Group Sdn Bhd. Kimarie is a business
that provides hairdressing services and hairdressing education to the public. The group
official headquarter is located at Kuala Lumpur city centre: 48A Level 1, Jalan Bukit
Bintang, 55100 Kuala Lumpur. The first Kimarie outlet was established in 1982 ("About Us",
n.d.). Kimarie is a family business which was founded by Vincent Ho’s family, Vincent Ho’s
is the current managing director of the group. Today, the group now has a total of 9 salon
centres, including Kuala Lumpur, Petaling Jaya, Bangsar, Puchong, Kota Damansara and so
on. The group also currently has 2 academic institutions, located in Kuala Lumpur and
Petaling Jaya.

1.1 Goods and Services Produced

Kimarie Group provides the common hairdressing services, such as haircut, colouring,
styling, perming, treatment, etc. Due to its promised excellent services and good reputation, it
is found that their pricing is slightly higher than most of the market competitors. For
example, a male haircut by lead stylist will cost RM59 and a female haircut by lead stylist
will cost RM65. Kimarie Group also provides a range of education program to the public.
They provide courses such as diploma and Sijil Kemahiran Malaysia (SKM) program.
Kimarie is certified and recognized by the Malaysia government to provide SKM certification
to their students. SKM is a certification is a that represents quality training and hairdressing
programme that is recognized by the Malaysian government and the hairdressing industry.

1.2 Company Achievement

Kimarie group has achieved numerous excellent award and recognition from the industry.
Kimarie is the home of one of the four L’Orèal I.D. artists in the Malaysia, leading the
hairdressing industry in both trends and haircare. Moreover, it is also the official hair partner
for Mercedes-Benz Fashion Week Kuala Lumpur. Graduates from Kimarie have also won
several international awards, such as the Wella Freestyle Competition and L’Oreal Colour
Trophy. To date, their academy has trained more than 10,000 hairstylists throughout
Malaysia and Singapore. From these past company achievements, we can conclude that
Kimarie Group provides excellent hairdressing services to their client, as well as quality
education programmes to their students.
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2.0 Characteristics of Monopolistic Market Structure

Monopolistic market structure has very unique characteristics that distinguish it from other
market structure. Samidi, Abdullah, Ali & Mohaideen (2013) has defined monopolistic
market as an economic market made up from quite a large quantity of firms, producing a
variety of goods which are close substitutes of each other. Samidi, Abdullah, Ali &
Mohaideen (2013) also mentioned that these firms compete with each other by the
uniqueness of their product and has a slight power to determine the price level of their
products. Kimarie Group is operating under a monopolistic market because the hairdressing
industry matches the following characteristics of a monopolistic market.

2.1 Quite a Large Number of Buyers and Sellers

The hairdressing industry involves a large number of sellers and buyers. Everyone will need a
hairdressing service, especially basic service such as haircuts. Hence, there is a lot of buyers
for the hairdressing service in Malaysia. At the same time, there is a lot of different salons
and barber shops in Malaysia. The number of sellers in hairdressing industry is much more
than the number of sellers in a monopoly and oligopoly market. Pettinger (2012) has stated
that an oligopoly is made up from a few large firms and a monopoly market is made up of
one unique firm. From here, we can conclude that the hairdressing industry is not under a
monopoly and an oligopoly market.

2.2 Differentiated Products that are Close Substitutes

Khemani & Shapiro (2002) state that unlike a perfectly competitive market, the products in a
monopolistic market are differentiated. As a result of differentiation, their products are close
substitutes for each other, but not a perfect substitute. For the hairdressing industry, all the
salons and barber shops provide identical and similar services, such as haircut, colouring,
perming, etc. The clients can get identical and similar services from these shops but they are
not exactly the same. For example, a customer getting his haircut from a normal salon and
Kimarie will have his haircut, but the style and the quality of experience he had will be
different. Samidi, Abdullah, Ali & Mohaideen (2013) has discussed about a few ways of
product differentiation as below:
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2.2.1 Services Quality

The services quality, such as the attitude of the hair stylist, the language they speak, the
relationship they build with their existing clients. This differentiation is very important for
service industry such as Kimarie. A lot of clients go to certain salons because they are
satisfied with the service quality they received previously. This will help Kimarie to
differentiate itself among the many other salons.

2.2.2 Latest Styling

Kimarie’s target customer group generally has a higher amount of income than the average,
this is reflected from the price they are charging their clients. In return, Kimarie promised the
latest trend and style of hairdressing to their clients. To date, there are a lot of well-known
stylists working under Kimarie. In addition, Kimarie also received numerous awards and
recognitions from the industry. This will help the consumers to differentiate Kimarie from
many other normal salons.

2.2.3 Location Distribution

Consumers are able to differentiate different salons through their locations. There is a total of
9 Kimarie salons in Malaysia currently. As a result, the consumers who are not staying in
these 9 areas will have to choose another salon. In reality, most consumers commonly would
prefer to go to a salon that can be easily accessed or is near to their location.

2.3 Freedom to Leave or Enter the Market

There is unrestricted freedom for a firm in a monopolistic market to enter or exit the market
(Samidi, Abdullah, Ali & Mohaideen, 2013). If a firm in a monopolistic market experiences
positive economic profit, new firms will try to enter the market by producing similar goods
(or services). Unlike a monopoly and an oligopoly market, the existing firms do not have any
power or ability to prevent new firms from entering the market. In reality, Kimarie does not
have any power, rights, or ability to prevent a new salon from providing a similar service.
Anyone can start a salon that provides identical service quality and target the same group of
clients. This is because there is no barrier such as the copyright legal barrier, advanced
technology, economies of scale barrier do not exist in the hairdressing industry.
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2.4 Price Control and Elastic Demand

Samidi, Abdullah, Ali & Mohaideen (2013) concluded that the source of power of a
monopolistic firm to control their price comes from the uniqueness of their products. The
more differentiated their product is, the lesser substitutes the consumers can find in the
market, and therefore, the higher the price the firm can charge its clients. As a result, a
monopolistic firm like Kimarie will have a negative sloping demand curve from the left to the
right. Although the demand curve is similar with a demand curve of a monopoly firm, the
power possessed by the firm is less than a monopoly firm, because the products of a
monopolistic firm have close substitutes (Samidi, Abdullah, Ali & Mohaideen, 2013).
Consequently, if Kimarie charges its price too high, their clients can easily have their
hairdressing services from another salon.
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3.0 Short Run Market Equilibrium

Short run is defined as a period of time where at least one input of production is fixed
(Hubbard & P.O' Brien, 2013). Samidi, Abdullah, Ali & Mohaideen (2013) also concluded
that firms cannot leave or enter a monopolistic market in the short run period. This is largely
due to a lot of factors of productions, such as plants, technology, machineries are fixed within
the short run period. Consequently, Samidi, Abdullah, Ali & Mohaideen (2013) mentioned
that firms cannot change their supply in a large scale, but is able to increase or decrease their
supply in a small quantity during the short run period. For example, Kimarie cannot expand
another outlet (which will largely increase their supply) within the short run period because
the time period is too short to construct a new outlet. Moreover, Kimarie may also face
difficulty recruiting experienced stylists to work in the new outlet.

Hubbard & P.O' Brien (2013) has defined market equilibrium as a state where quantity
supplied of a product or service is equal to quantity demanded of the product or service. At
this point, the consumers purchase the exact quantity (equilibrium quantity) produced by the
sellers at an agreed price (equilibrium price). The equilibrium price and quantity will remain
constant and stable, unless there is an external force which impact the market (Samidi,
Abdullah, Ali & Mohaideen, 2013).

Samidi, Abdullah, Ali & Mohaideen (2013) has discussed that a monopolistic firm must
achieve short run equilibrium to maximise profit. Based on the total revenue and total cost
approach discussed by Samidi, Abdullah, Ali & Mohaideen (2013), a firm must produce at
the point where marginal revenue is equal to marginal cost. This outlet level is the point
where the total revenue and total cost is the largest, and therefore, the profit is maximized.
The main objective of any firm is maximising profit. Assuming Kimarie aim to maximise
profit, Kimarie will produce at the profit maximisation point where its marginal revenue is
equal to its marginal cost. Even at the profit maximisation output level, Kimarie does not
necessarily earn positive economic profit. There are 3 possible economic outcomes as
discussed below.
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3.1 Supernormal Profit

Supernormal profit is the condition where a firm earns an economic profit. As a monopolistic
market firm, Kimarie’s demand curve also represents its average revenue curve, which slopes
downwards from the left to the right, and the gradient is twice the gradient of the demand
curve (Samidi, Abdullah, Ali & Mohaideen, 2013). In a supernormal profit state, Kimarie
will maintain its average total cost (ATC) curve below its average revenue (AR) curve.

Figure 1 : Supernormal profit of Kimarie in the short run period.

Figure 1 illustrates the economic profit condition of Kimarie in the short run period with its
marginal cost (MC) curve, average total cost (ATC) curve, demand (D) curve, average
revenue (AR) curve, and marginal revenue (MR) curve. Assuming Kimarie aim to maximise
profit, Kimarie will produce at the profit maximisation point where its marginal cost is equal
to marginal revenue. This is reflected in diagram 1 by producing at point E where the MC
curve intersects the MR curve. The output level at point E is Qq, which is the equilibrium
quantity as well as the quantity supplied of Kimarie. Pq represents the equilibrium price as
well as the product price of Kimarie. The profit is represented at the blue shaded area, which
can be calculated by ( product price – average total cost )* quantity, which is (Pq – P) * Qq.
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3.2 Normal Profit

Because the power to control prices is not as strong as the power possessed by a monopoly
firm, the demand for Kimarie’s services is elastic and therefore, Kimarie will not always earn
supernormal profit in the short run. When the market condition is not in favour to Kimarie or
when the demand for Kimarie’s services drop, Kimarie might fall into the state of normal
profit condition. Normal profit refers to the condition where a firm reaches a breakeven point
where the firm does not gain profit or loss. This also means that the firm's total revenue is
equal to the total cost.

Figure 2 : Normal profit of Kimarie in the short run period.

Figure 2 illustrates the normal profit condition of Kimarie in the short run period. As in any
condition, Kimarie will produce at point E where its marginal cost is equal to marginal
revenue. This helps Kimarie to minimize economic loss and help Kimarie to stay on the
breakeven point. Figure 2 reflects the breakeven point as the ATC curve intersects with the D
curve at point E. This indicates that the average revenue is only same as the average total
cost. In other words, each unit of production does not bring any profit or loss to Kimarie.
Since the revenue is enough to cover the cost of production, the company is better off
continuing the business than shutting it down. Stopping the production will cost the business
owners to lose money on the fixed cost of production.
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3.3 Subnormal Profit

Kimarie might face an economic loss if the demand curve is weaker than its ATC curve.
Subnormal profit is the condition where a firm gains economic loss. In this condition,
Kimarie’s total revenue is less than its total cost of production.

Figure 3 : Subnormal profit of Kimarie in the short run period.

Figure 3 illustrates the normal profit condition of Kimarie in the short run period. The ATC
curve of Kimarie is higher than the D curve, which reflect that the cost of production per unit
is higher than the revenue gained per unit. To minimise loss, Kimarie will produce at point E
where its marginal revenue is equal to its marginal cost. The red shaded area represents the
economic loss faced by Kimarie. It is calculated by ( Cost per unit - revenue per unit) *
quantity, which is ( P - Pq ) * Qq.

.
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4.0 Long Run Market Equilibrium

Long run is defined as a period of time where all inputs of production are not fixed (Hubbard
& P.O' Brien, 2013). Due to easy entry and exit, firms in a monopolistic market can enter and
exit the market freely in the long run period. In the hairdressing industry, there is no major
obstacles or factors that prevents new salons from entering the market, or existing salons
from exiting the hairdressing industry. Consequently, Kimarie and other salons can alter their
quantity supplied in a large amount of quantity. This is because they are able to alter their
fixed cost of production. For example, Kimarie can train more skilled stylists and open more
outlets in the long run.

As discussed by Samidi, Abdullah, Ali & Mohaideen (2013), any positive economic profit in
the short run period will attract new firms from entering the market. Subsequently, any
negative economic profit in the short run will cause the existing firm to exit the market.
Assuming that Kimarie gain supernormal profit in the short run, it will attract new salon to
enter the industry. The new salons will produce identical services as Kimarie’s services. This
will attract part of Kimarie’s existing customers to the new salons.

Figure 4: Long run equilibrium of Kimarie.

D1, MR1, Q1, P1 and E1 illustrates the market condition of Kimarie before the new salons
enter the industry. The blue shaded region is the short run economic profit. When the new
salons enter the industry, the demand curve for Kimarie’s services drops from D1 to D2.
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Consequently, the marginal revenue drops from MR1 to MR2, and a new equilibrium is
formed at E2. Kimarie now produced at output level Q2 where the average revenue of the
services is same as the average total cost of the services. This is reflected in figure 4 as the
AR2 curve intersects with ATC curve at output level Q2. As a result, Kimarie gain normal
profit.

In the opposite, if Kimarie and most of the salons face negative economic profit, some of the
existing salons with weak financial background will quit the industry. Consequently, this will
increase the demand for Kimarie’s services as part of the customers of the salons that have
shut down will go to Kimarie. This will reduce the loss faced by Kimarie and other salons.
Salons will continue to shut down until there is no more economic loss in the industry.
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5.0 Conclusion
To conclude, Kimarie Group was chosen as the monopolistic firm in this assignment.
Kimarie is a salon business while also partly provides hairdressing education. Kimarie is
proven to be operating under a monopolistic market because there are a lot of other salons
providing differentiated services which are close substitutes to its services. All the salons also
have easy access to enter and leave the hairdressing industry.

In the short run period, Kimarie might earn supernormal profit, normal profit or subnormal
profit. In the long run, market coordination will eliminate all short run profit and loss and
bring to a condition Kimarie and all the other salons earn normal profit.

(2741 Words)
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References

About Us. Retrieved from https://www.kimarie.com.my/about-us/

Hubbard, R., & P.O' Brien, A. (2013). Economics (4th ed.). United State of America: Pearson
Education Limited.

Khemani, R., & Shapiro, D. (2002). Monopolistic Competition. Retrieved from

https://stats.oecd.org/glossary/detail.asp?ID=3260

Pettinger, T. (2012). Types of Market Structure. Retrieved from

https://www.economicshelp.org/microessays/markets/

Samidi, M., Abdullah, N., Ali, J., & Mohaideen, Z. (2013). BBEK 1103 Principles of
Microeconomics / Microeconomics 1 (2nd ed.).