PRICE AND OUTPUT

DETERMINATION UNDER
IMPERFECT COMPETITION
 DEFINING MARKET

 Market :- In economics sense , market is a

system by which buyers and sellers
bargain for the price of a product , settle
the price and transact their business – buy
and sell a product.

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 STRUCTURE OF MARKET
Market No. of firm and Nature of ind. Where Control Method of
structure degree of prevalent over price marketing
production diff.
1) Perfect Large no. of firms Financial market and None Market
competition with homogeneous some farm products exchange or
product auction
2 )Imperfect
competition
Many firm with real Competitive
a) Monopolistic or perceived Manuf. Tea ,shoes ,TV Some advertising
product sets etc. quality rivalry
differentiation
b) Oligopoly Little or no product Aluminum, Steel, Some Competitive
differentiation cigarette , cars, advertising
quality rivalry
c) Monopoly A single producer , Public utilities , Considera Promotional
without close electricity, railway ble but advertising if
substitute usually supply is large
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regulated
 IMPERFECT OR MONOPOLISTIC
COMPETITION
MEANING:-
 In real life, we experience imperfect competition,
which is in between situation of perfect
competition and monopoly . Imperfect competition
has been termed as monopolistic competition.
 a state of affairs in which there is large number of
sellers selling non homogeneous or slightly
differentiated products in which there is freedom of
entry - exists.
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DEFINITION

“The term monopolistic competition refers to the market

structure in which the sellers do have a monopoly (they are
the only sellers) of their product, but they are also subject to a
substantial competition pressures from sellers or substitute
products”. - Baumol

“Monopolistic competition is a market situation in which

there are many sellers of particular product but the product
of each seller is in some way differentiated in the minds of
consumer from the product of other sellers.”
- Leftwitch

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 CHARACTERISTICS OF IMPERFECT
COMPETITION
 More sellers- There are large no.of sellers of products but none
controls the major portion of the total output

 Differentiated Product-various firms under monopolistic competition

bring differentiated products which are relatively close substitutes of
each other but not perfect substitutes

 Easy Entry or Exit of Firms-there is easy entry and exit of the firm in
monopolistic competition

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 CONTD.
 Free Pricing Policy of Firm-In monopolistic
competition , the firms have differenciated products so it
has control over its prices

 Nature of revenue curves and cost curves-no single firm

controls more than a small portion of the total output..
The demand curve of the firm is neither perfectly elastic
nor rigidly inelastic

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o AR and MR are the curve of the firm .the average revenue
tends to be quite elastic because of the product differentiation
and total no of firms operating in that group

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DIFFERENTIATING BETWEEN :-
MONOPOLISTIC COMPETITION & PERFECT
COMPETITION
MONOPOLISTIC PERFECT COMPETITION
COMPETITION
1. Products are differenciated, 1. Product are homogeneous.
products are generally
differenciated by brand name,
trade mark, design ,colour, after
sales services

2 .In monopolistic competition, 2. Decision making in firms is

firms decision making and behaviour independent of other firms..
is not absolutely independent of each
other.

3. In monopolistic competition, no of 3. No of sellers is very large

sellers is large but limited
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PRICE AND OUTPUT DETERMINATION
IN SHORT RUN
The analysis of short period equillibrium of a firm
under monopolistic competition is based on the following
assumptions:
 Large no of sellers who behave independently.

 Product of each seller is different

 The firm has determined demand curve which is elastic

 No new firms enter the industry in short period situation

 Short run cost curves of each firms differ from the other..

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PRICE AND OUTPUT DETERMINATION IN
SHORT RUN

SMC
SAC
P
Unit- D
Cost
C
& M
revenue AR
N

MR
X
O Q OUTPUT
DIAGRAM EXPLAINATION

 The diagram gives short run revenue and cost curves

faced by monopolistic competition
 As shown in the figure, firms MR(marginal revenue)
intersects MC(marginal cost) at point N
 This point fulfills the necessary conditions of profit
maximization at point OQ……
 Given the demand curve , this output can be sold at price
PQ ,so the price is determined at PQ.
 At this output and price ,the firm earns a maximum
monopoly or economic profit equal to PM per unit of
output and a total monopoly profit shown by the
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rectangle CDPM
CONTD.
 The economic profit exists in short run because there is
no or little possibility of new firm entering in the
market..
 The rate of profit would not be the same for all firms
under monopolistic competition because of difference of
elasticity of demand of product…
 There are 3 situations in short run period-situation of
super profit, situation of profit and situation of loss

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CONTD.
 Super Profit making situation: when individual firms
revenue will be greater than its cost(AR>AC)
 Profit making situation: when the firms average revenue
will be equal to its average cost the situation is called
normal profit(AR=AC)
 Loss situation: a firm will earn loss when its cost is
greater than its revenue(AR<AC)

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PRICE AND OUTPUT DETERMINATION IN
THE LONG RUN
 In the long period the price and output policy of an
individual firm is determined by one general principal
where marginal revenue and marginal cost are equal to
each other ……
 In long period the individual firm as well as the group as
a whole remain stable equillibrium
 To achieve the full equillibrium in the long run 2
adjustments have to be made
1. all the quantity offered for sale must be equal to its
demand in the market at a given price
2. entry and exit in response to the general position of the
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existing firm
Diagram

LMC
LAC
P
T
Price M Profit
E AR(P)
EI

MR
X
O Q
Output
DIAGRAMATIC EXPLANATION

 AR and MR are the average revenue and marginal

revenue curve of the firm.
 LMC and LAC are the long period marginal cost curve
.every firm equates its marginal cost to its marginal
revenue
 In the diagram , E1 is the point of equillibrium when the
new entry of the firm is restricted then the firm enjoys
super normal profits with the OQ level of output as OP is
the price and EQ or OM is the cost per unit of product
and difference between the two shows the profit
situation. Equal to the area MPTE…
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CONTD.

 Thus MPTE is the super normal profit of a firm under long period
situation when the entry of the new firm is restricted but this
profit situation will attract other firms to enter..

 In monopolistic competition, following two situations arise in the

long period
 1)Free entry of firm 2)Restricted entry of the firm

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.

THANK
YOU
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