MODEL ANSWER

Name: - Shashank Shaw

Roll No: - 160 Class: - 1
st
Semester Sec: - B
Subject: - Micro and Macro Economics MME!
"acult#: - Mr$ Sumato Bhattachar#a
Colle%e: - &$'$ Birla (nstitute 'e)artment *+ Mana%ement!
,$ -h# do we ha.e the e/istence o+ e/cess ca)acit# in mono)olistic com)etition0
'iscuss the social desirabilit# o+ mono)olistic com)etition
1ns! (n mono)olistic com)etition there are a lar%e number o+ bu#ers and sellers in the
market but each +irm unlike )er+ectl# com)etiti.e +irm is a )rice maker and )roduces
sli%htl# di++erentiated )roduct$ 2he# sell the same )roduct with di++erent brand names
Each +irm is a )rice maker and hence the# +ace downward slo)in% 1R 1N' MR cur.es
in the short run$ (n the lon% run due to +ree entr# and e/it )roduction increases and )rice
+alls and each +irm wants to )roduce at the lower minimum cost$
'ue to the increase in the number o+ +irms3 the +irms are in a no )ro+it-no loss situations
or else earn normal )ro+it in the lon% run$ But unlike a )er+ect com)etition each +irm
cannot )roduce at minimum )oint o+ 41C$ 2he# )roduce at the downward or +allin%
)ortion o+ 41C but cannot )roduce at minimum 41C$
2hat is the reason that each +irm under mono)olistic com)etition has e/cess ca)acit#
which the# cannot utili5e to )roduce at minimum 41C$
Mono)olistic com)etition is a common market structure where man# com)etin%
)roducers sell )roducts that are di++erentiated +rom one another that is3 the )roducts are
substitutes3 but are not e/actl# alike3 similar to brand lo#alt#!$ Man# markets are
mono)olisticall# com)etiti.e6 common e/am)les include the markets +or restaurants3
cereal3 clothin%3 shoes and ser.ice industries in lar%e cities$
2he social desirabilit# o+ mono)olistic com)etition is as +ollows:-
1$ E/istence o+ e/cess ca)acit#- (t means that the )roducer is able to char%e a )rice +rom
the consumer which is e.en hi%her than the Mar%inal Cost$
7$ 4oss in consumer sur)lus$
8$ 4e.el o+ out)ut is less than that o+ out)ut in )er+ect com)etition- 2his is due to the
downward slo)in% 1R and MR cur.e$
9$ (n case o+ mono)olistic com)etition3 there is a dead wei%ht loss$
:$ ;n+air e/)enditure incurred b# the +irm on ad.ertisement +or )roduct di++erentiation:-
1d.ertisin% induces customers into s)endin% more on )roducts because o+ the name
associated with them rather than because o+ rational +actors.
6$ (n a mono)olisticall# com)etiti.e en.ironment3 there are uni<ue in+ormation and
in+ormation )rocessin% costs associated with selectin% a brand: - (n a mono)ol# industr#3
the consumer is +aced with a sin%le brand and so in+ormation %atherin% is relati.el#
ine/)ensi.e$ (n a )er+ectl# com)etiti.e industr#3 the consumer is +aced with man# brands$
=owe.er3 because the brands are .irtuall# identical3 a%ain in+ormation %atherin% is
relati.el# ine/)ensi.e$ "aced with a mono)olisticall# com)etiti.e industr#3 to select the
best out o+ man# brands the consumer must collect and )rocess in+ormation on a lar%e
number o+ di++erent brands$ (n man# cases3 the cost o+ %atherin% in+ormation necessar# to
selectin% the best brand can e/ceed the bene+it o+ consumin% the best brand .ersus a
randoml# selected brand!$
>$ (n most mono)olistic com)etiti.e markets3 mono)ol# )ower is small$ ;suall# enou%h
+irms com)ete3 with brands that are su++icientl# substitutable3 so that no sin%le +irm has
much mono)ol# )ower$ 1n# resultin% deadwei%ht loss will there+ore be small$ 1nd
because +irms? demand cur.es will be +airl# elastic3 a.era%e cost will be close to the
minimum$
@$ 1n# ine++icienc# must be balanced a%ainst an im)ortant bene+it +rom mono)olistic
com)etition: )roduct di.ersit#$ Most consumers .alue the abilit# to choose amon% a wide
.ariet# o+ com)etin% )roducts and brands that di++er in .arious wa#s$ 2he %ains +rom
)roduct di.ersit# can be lar%e and ma# easil# outwei%h the ine++icienc# costs resultin%
+rom downward-slo)in% demand cur.es$
BIBLIOGRAPHY
1. Class Notes$
2. Micro-Economics A Bind#ck
3. htt):CCen$wiki)edia$or%CwikiCMono)olisticDcom)etition
4. http://en.wikipedia.org/wiki/excess_capacity