Economics-1

BALLB-207

Monopolistic and
Imperfect
Competition

Ms. Lavi Vats

Meaning of Monopolistic Competition
• Monopolistic competition refers to a market structure in which there
are many sellers selling similar but differentiated products and there
is existence of free entry and free exit of firms.Consumer goods like
toothpaste,bathing soaps,detergents,refrigerators etc.
• “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.”
Features of Monopolistic Competition
• There are large number of buyers and many sellers.
•  Firms under monopolistic competition are price makers. They set
their own price.
• Firms produce differentiated products. It is the key element of
monopolistic competition.
•  There is a free entry and exit of firms.
•  Firms compete with each other by incurring selling cost or
expenditure on sales promotion of their products.
•  Non – price competition is an essential part of monopolistic
competition.
Equilibrium under Monopolistic Competition

Short Run Analysis (Partial

Equilibrium)

A firm under monopolistic

competition may earn
profits,suffer losses or get only
normal profit in the short run.
Equilibrium under Monopolistic Competition

Long Run Analysis (Group Equilibrium)

In the short run a firm under monopolistic competition may earn
super normal profit or incur loss. 
 
But in the long run, the entry of the new firms in the industry will wipe out
the super normal profit earned by the existing firms. The entry of new firms
and exit of loss making firms will result in normal profit for the firms in the
industry.
Excess Capacity under Monopolistic Competition
• The excess capacity refers to the difference
between ideal(optimum) output and the
output actually attained in the long run.
• All firms have under monopolistic
competition excess capacity in the long run
equilibrium.
• Here equilibrium output is less than the least A
E
cost output,since downward sloping curve
can be tangential to tha U shaped LAC curve
at some point to the left of minimum point. AR
Evaluation of Monopolistic Competition

• Interdependence
• Naive Behaviour
• Product differentiation and free entry
• Waste on Advertisement
• Group boundaries
• Excess Capacity
• Transport Waste
Comparison of Monopolistic Competition and Perfect Competition

• Product differentiation
• Selling and Transportation cost
• Concept of industry
• Equilibrium HOMEWORK
• Excess Capacity
THANK
YOU
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