MONOPOLISTIC COMPETITION

by • 02/07/2011 • B.COM PART 1 EconomicsComments (0)1116

MONOPOLISTIC COMPETITION

“A market type in which a large number of firms compete with one another by making similar but slightly different products”.

Equilibrium Of Firm In Short-Run Under Monopolistic Competition

Short run is a period in which variable factor like labor can be altered while fixed factor cannot be changes. In short run two costs exist, that is variable and fixed cost.

SUPER NORMAL PROFIT/ ABNORMAL PROFIT :

In this condition average revenue (AR) or market price is above than average cost (AC). This can be explained by the following diagram.

The AR & MR curve show average and marginal revenue respectively. AC and MC are average and marginal cost curves of a firm respectively.

At point E, MR = MC and condition of equilibrium is fulfilling.

From equilibrium point E, a perpendicular is drawn which cuts x- axis.

OP= Price per unit

OT= Cost per unit

OM = Output

OPSM = Total revenue

OTQM = Total cost

Total revenue > Total cost

Profit area = TPSQ

NO PROFIT/ NO LOSS OR NORMAL PROFIT

At a point where firm total revenue is equal to total cost firm is achieving normal profit. In other words, at this situation firm just covering all its cost.

This situation can be explained by the following diagram.

This can be explained by the following diagram:

OP= Price per unit and cost per unit

OPSM = Total revenue and Total cost

Total revenue = Total cost

So the firm is neither getting profits nor losses or firm is in normal profit.

CONDITION OF LOSSES:

In this condition average revenue (AR) or market price is less than average cost (AC). This can be explained by the following diagram:

OP= Price per unit

OT= Cost per unit

OM = Output

OPQM = Total revenue

OTSM = Total cost

Total revenue < Total cost

Loss area = PTSQ

In the above case, firm is meeting some part of its expenses i.e. Out of total cost of OANK, it is getting OAML only. If firm stops its production, in short run, it will loose much because the firm will have to bear all fixed expenses. In short run firm will continue to do business and shall bear some cost, with the hope of better prospects in future.

Equilibrium Of Firm In Long-Run UnderMonopolistic Competition

  • Profit encourages new firms to enter market.
  • New entries shift the demand curve for existing firms to the left.
  • Long-run equilibrium occurs when new firms see no further incentive to enter.
  • Firm cannot continue business in losses in the long period of time.

Price = AR

AR= is not equal to MR

MR= MC (For determination of output this requirement is a must).

This can be explained by the following diagram.

OP= Price per unit and cost per unit.

OPQM = Total cost and total revenue

Point “E” shows the equilibrium point where marginal cost cuts marginal revenue.

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