Monopolistic Competition

Monopolistic competition is a market

structure which combines element of
monopoly and competitive market.
Essentially a monopolistic competitive
market is one with freedom of entry and
exit, but firms can differentiate their
product.

They have an inelastic demand curve and

so they can set price. However because
there is freedom of entry, supernormal
profits will encourage more firms to enter
the market leading to normal profit in the
long term.
Characteristics of a market with
monopolistic competition

 Large number of buyers.

 Large number of seller.

 Product is differentiated only due to

branding.

 No entry and exit barriers.

 ostJ
Rnve nuc
Mc

H
p -

Output 0 Q
(a) (b)

Costl
Revenue MC

p-

AR
0 Q Q* Output
(c)
FIGURE9.5 Pricing under Monopollstlc Com etltlon
A firm may make profit incur losses of break
even in the short run

In figure 9.5(a) diagrammatic representation

of a firm making profit in monopolistic
market

Marginal cost curve cut the marginal revenue

curve below at the point of equilibrium ‘E’

Draw a vertical projection from this point E

ON THE x- axis on the average revenue &
average cost curve. These points are the Q
R C respectively.

Draw a horizontal perpendicular from R & C

on this Y- axis let them interest with the Y-
axis point P & G respectively.
The area of the rectangle OPQR indicate
total revenue
The area of rectangle OGCQ Indicate total
cost. in this graph average revenue curve
lies above average cost curve at the point
of equilibrium. The area of rectangle OPQR
is more than the OGCQ
The firm make profit shown by CPRC.
Average revenue curve becomes tangential
to average cost curve the point equlibrium
the total revenue & total cost will be be
exactly equal to the area of rectangle. OPTQ
It neither make profit or loss in incomes
only make normal profit.

Long run monopolistic competition perfect

computation rarely exist in the real market.

Monopolistic competition is perhaps the

most commonly found market structure.
Most of the things the consume daily fall
into this category.
The pens, toothpastes, soaps, perfume,
cloths etc.
All are characterized by monopolistic
competition the same quantity packs of all
the toothpaste whether they be
Colgate, Cibaca, promise forhansor close
up.

In long run the equilibrium output OQ is

less than OQ1
Society desires the optimum output at the
low cost. But a monopolistic firm produce
less than the what it can.
These always some excess capacity left in
market structure.

Average cost curve is U shaped

Average revenue is falling straight line.
Average revenue can be tangent to the
average cost curve only when the average
cost curve is falling too.
Average cost curve fall before it reaches
its minimum point the equilibrium output
will be lower than the optimum output.