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DETERMINATION UNDER
MONOPOLISTIC
COMPETITON
MONOPOLISTIC
COMPETITION
Monopolistic competition is a market structure
in which there are many sellers of a
commodity, but the product of each seller
differs from that of the other sellers in one
respect or the other.
According to J.S. Basins, “monopolistic
competition is market structure where there is
a large number of small sellers, selling
differentiated but close substitute products.”
CHARACTERISTICS OF
MONOPOLISTIC COMPETITION
Large number of firms and buyers
Product differentiation
Freedom of entry and exit of firms
Selling costs
Price control
Limited mobility
Imperfect knowledge
Non-price competition
DETERMINATION OF PRICE AND
OUTPUT UNDER
MONOPOLISTIC COMPETITION
Firm under monopolistic competition
produces up to that limit where its
marginal cost is equal to marginal
revenue, (MC=MR) and MC curve cuts
MR curve from below. In case of
monopolistic competition, price and
equilibrium position of firm and group
will be studied in two parts: (1)Firm’s
equilibrium and (2) Group’s equilibrium.
EQUILIBRIUM OF THE FIRM
SUPER NORMAL
NORMAL MINIMUM
NORMAL PROFIT
PROFIT LOSS
PROFIT
SHORT PERIOD
EQUILIBRIUM
Short-run refers to that time period in
which output can only be increased
by changing the quantity of variable
factors. there is no time to change in
fixed factors of production like
machines, plants, factory, building
etc.
SUPER NORMAL PROFIT
Y
MC
AC
A
P
C B
REVENUE
E AR
M
O R X
M
OUTPUT
Firm is in equilibrium at point E, because at this point
MC=MR. Point E indicates that the firm’s equilibrium
output is OM. Price of equilibrium output is OP(=AM). AM
is greater than the BM. Hence the firm earns super
normal profit equivalent to difference between AM and
NORMAL PROFIT
Y MC
AC
A
P
REVENU
E
E
AR
MR
O
M X
OUTPUT
Firm is in equilibrium at point E where MC=MR and OM
will be equilibrium output. Price of the equilibrium output
is OP(=AM) and average cost is also OP(=AM). It is so
because, AR curve is touching AC curve at point A. Hence
AR=AC and firm earns normal profit.
Y MINIMUM LOSS
LOSS SAC AVC
MC
P B
REVENUE A
P1
E MR=MC
AR
MR
O M X
OUTPUT
LAC
A
REVENUE P
E MR=MC AR
MR
O X
M
OUTPUT
In this MC=MR at point E which is
equilibrium point. OM is equilibrium
output and OP(=AM) is the price
equilibrium output. At equilibrium
output OM, average revenue curve is
tangent to LAC curve at point A
which means AR=LAC. Hence firms
earns only normal profit.
COMPARISON BETWEEN
MONOPOLISTIC AND PERFECT
COMPETITION
Assumption regarding product
Assumption regarding number of buyers and
sellers
Assumption regarding degree of knowledge
Implication regarding decision
Implication regarding condition of maximum
profit
Comparison regarding price
Comparison regarding profit
Assumption regarding shape of
demand curve REVENUES CURVES
REVENUE CURVE UNDER Y UNDER MONOPOLISTIC
Y
PERFECT COMPETITION COMPETITION
AR=MR REVENUE(RS
P .)
REVENU
E
MR AR
O
O X OUTPUT X
OUTPUT
Comparison regarding output
LAC
Y Y LMC
LMC
LA
C P B
E
REVENU P AR=MR
P
P
A
E REVENU1
E
E AR
NORMAL
PROFIT
M
O X O R
Q M N X
OUTPUT OUTPUT
COMPARISION BETWEEN
MONOPOLISTIC COMPETITION
AND MONOPOLY
Assumption regarding product
Assumption regarding number of
sellers and buyers
Assumption regarding entry
Assumption regarding degree of
knowledge
Implications regarding decisions
Comparison regarding profit
Different average and marginal
revenue curves REVENUE CURVES
Y Y UNDER MONOPOLISTIC
REVENUE CURVES UNDER COMPETITION
MONOPOLY
REVENUE
REVENUE(RS.)
(RS.)
AR
M AR MR
R
O O
OUTPUT X OUTPUT X
CONCLUSION