File Name: price and output determination under monopolistic competition .zip
Microeconomics pp Cite as. The theory of monopolistic competition considers a market structure that lies between the limiting cases of monopoly and perfect competition, the main feature distinguishing it from perfect competition being product differentiation.
- Price and Output Determination Under Monopolistic Competiton
- Price Determination under Monopolistic Competition | Economics
- Short-Run and Long-Run Price Determination of a Firm | Monopolistic Competition
- Price-Output Equilibrium under Monopolistic Competition
Definition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets.
Under monopolistic competition, organizations need to make optimum adjustments in the prices and output sold to attain equilibrium. Apart from this, under monopolistic competition, organizations also need to pay attention toward the design of the product and the way the product is promoted in the market. Moreover, an organization under monopolistic competition is not only required to study its individual equilibrium, but group equilibrium of all organizations existing in the market. Let us first understand individual equilibrium of an organization under monopolistic competition.
Price and Output Determination Under Monopolistic Competiton
Price Determination under Monopolistic Competition. Imperfect competition covers all situations where there is neither pure competition nor pure monopoly. Both perfect competition and pure monopoly are very unlikely to be found in the real world. In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition. The monopolistic competition is one form of imperfect competition. Monopolistic competition refers to the market situation in which many producers produce goods which are close substitutes of one another.
Two important distinguishing features of monopolistic competition are:. In monopolistic competition, products are not homogenous nor are they only remote substitutes. These are the products produced by competing monopolists that have separate identity, brand, logos, patents, quality and such other product features. Product differentiation does not mean that goods are completely different.
Rather it means that products are different in some ways, but not altogether so. These imaginary differences are created through advertising, marketing, packaging and the use of trademarks and brand names. Each individual firm has relatively small part of the total market so that each has a very limited control over the price of the product. And each firm determines its own price-output policy without considering the reactions of rival firms. Hence competition is no longer exclusive on price basis.
The demand curve or AR curve under monopoly also slopes downwards, but there is a difference between demand curves facing under monopolistic competition and pure monopoly. Under monopolistic competition, the firm will be in equilibrium position when marginal revenue is equal to marginal cost.
So long the marginal revenue is greater than marginal cost, the seller will find it profitable to expand his output, and if the MR is less than MC, it is obvious he will reduce his output where the MR is equal to MC. In short run, therefore, the firm will be in equilibrium when it is maximising profits, i. As the new firms are entered into the industry, the demand curve or AR curve will shift to the left, and therefore, the supernormal profit will be competed away and the firms will be earning normal profits.
If in the short run firms are suffering from losses, then in the long run some firms will leave the industry so that remaining firms are earning normal profits.
The AR curve in the long run will be more elastic, since a large number of substitutes will be available in the long run. Therefore, in the long run, equilibrium is established when firms are earning only normal profits.
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Price Determination under Monopolistic Competition | Economics
According to J. AM is greater than the BM. Long period refers to that time period in which output can be increased by making changes in the quantity of both fixed as well as variable factors inputs. In long run firm earn only normal profit. Hence firms earns only normal profit. In monopolistic competition every firms enjoys super normal profit, normal profit, minimum loss in short run but in long run a firm enjoys only normal profit.
According to J. AM is greater than the BM. Long period refers to that time period in which output can be increased by making changes in the quantity of both fixed as well as variable factors inputs. In long run firm earn only normal profit. Hence firms earns only normal profit. In monopolistic competition every firms enjoys super normal profit, normal profit, minimum loss in short run but in long run a firm enjoys only normal profit. Open navigation menu.
Short-Run and Long-Run Price Determination of a Firm | Monopolistic Competition
A sudden heat wave may raise the price of ice. The wage rate on the right is higher because supply is more inelastic and demand is higher. A system of prices exists because individual prices are related to each other. The process of price determination can be explained with the help of following table below.
Price Determination under Monopolistic Competition.
Price-Output Equilibrium under Monopolistic Competition
Thus monopolistic competition refers to competition among many firms selling closely related but not identical products. So far we have been concerned with the product pricing under perfect competition and monopoly. But these are extreme cases which are seldom found in practice. In fact, there are market situations which fall in between these two extremes.
The equilibrium of the firm under monopolistic competition follows the usual analysis in the short- run and long-run. The short-run analysis of the firm under monopolistic competition is based on the following assumptions:. Each is a monopolist in his own sphere;. Given these assumptions, each firm fixes such price and output which maximises its profits.
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