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PRICE AND OUTPUT

DETERMINATION UNDER
MONOPOLISTIC
COMPETITON
MONOPOLISTIC
COMPETITION
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.
According to J.S. Basins, “monopolistic
competition is market structure where there is
a large number of small sellers, selling
differentiated but close substitute products.”
CHARACTERISTICS OF
MONOPOLISTIC COMPETITION
 Large number of firms and buyers
 Product differentiation
 Freedom of entry and exit of firms
 Selling costs
 Price control
 Limited mobility
 Imperfect knowledge
 Non-price competition
DETERMINATION OF PRICE AND
OUTPUT UNDER
MONOPOLISTIC COMPETITION
Firm under monopolistic competition
produces up to that limit where its
marginal cost is equal to marginal
revenue, (MC=MR) and MC curve cuts
MR curve from below. In case of
monopolistic competition, price and
equilibrium position of firm and group
will be studied in two parts: (1)Firm’s
equilibrium and (2) Group’s equilibrium.
EQUILIBRIUM OF THE FIRM

SHORT PERIOD LONG PERIOD

SUPER NORMAL
NORMAL MINIMUM
NORMAL PROFIT
PROFIT LOSS
PROFIT
SHORT PERIOD
EQUILIBRIUM
Short-run refers to that time period in
which output can only be increased
by changing the quantity of variable
factors. there is no time to change in
fixed factors of production like
machines, plants, factory, building
etc.
SUPER NORMAL PROFIT
Y
MC
AC
A
P
C B
REVENUE

E AR

M
O R X
M
OUTPUT
Firm is in equilibrium at point E, because at this point
MC=MR. Point E indicates that the firm’s equilibrium
output is OM. Price of equilibrium output is OP(=AM). AM
is greater than the BM. Hence the firm earns super
normal profit equivalent to difference between AM and
NORMAL PROFIT
Y MC

AC
A
P
REVENU
E
E
AR

MR
O
M X
OUTPUT
Firm is in equilibrium at point E where MC=MR and OM
will be equilibrium output. Price of the equilibrium output
is OP(=AM) and average cost is also OP(=AM). It is so
because, AR curve is touching AC curve at point A. Hence
AR=AC and firm earns normal profit.
Y MINIMUM LOSS
LOSS SAC AVC
MC

P B
REVENUE A
P1

E MR=MC
AR
MR
O M X
OUTPUT

In this firm will be in equilibrium at point E and MC=MR.


Price of equilibrium output OM is OP1(=AM) and average
cost OP(=BM) and AC>AR. Hence a firm suffer a loss
equivalent to BM-AM=AB per unit. But price of equilibrium
output OM=AVC as AVC touches curve AR at point ‘A’ and
fixed cost equivalent to AB per unit then the
total loss of firm will be BAP1P.
LONG PERIOD EQUILIBRIUM

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 each firm will
produce up to that limit where
MR=long run MC. In long run firm
earn only normal profit.
NORMAL PROFIT
Y
LMC

LAC
A
REVENUE P

E MR=MC AR

MR

O X
M

OUTPUT
In this MC=MR at point E which is
equilibrium point. OM is equilibrium
output and OP(=AM) is the price
equilibrium output. At equilibrium
output OM, average revenue curve is
tangent to LAC curve at point A
which means AR=LAC. Hence firms
earns only normal profit.
COMPARISON BETWEEN
MONOPOLISTIC AND PERFECT
COMPETITION
 Assumption regarding product
 Assumption regarding number of buyers and
sellers
 Assumption regarding degree of knowledge
 Implication regarding decision
 Implication regarding condition of maximum
profit
 Comparison regarding price
 Comparison regarding profit
 Assumption regarding shape of
demand curve REVENUES CURVES
REVENUE CURVE UNDER Y UNDER MONOPOLISTIC
Y
PERFECT COMPETITION COMPETITION

AR=MR REVENUE(RS
P .)
REVENU
E
MR AR
O
O X OUTPUT X
OUTPUT
 Comparison regarding output
LAC
Y Y LMC
LMC
LA
C P B
E
REVENU P AR=MR
P
P
A
E REVENU1
E
E AR
NORMAL
PROFIT
M
O X O R
Q M N X
OUTPUT OUTPUT
COMPARISION BETWEEN
MONOPOLISTIC COMPETITION
AND MONOPOLY
 Assumption regarding product
 Assumption regarding number of
sellers and buyers
 Assumption regarding entry
 Assumption regarding degree of
knowledge
 Implications regarding decisions
 Comparison regarding profit
 Different average and marginal
revenue curves REVENUE CURVES
Y Y UNDER MONOPOLISTIC
REVENUE CURVES UNDER COMPETITION
MONOPOLY
REVENUE
REVENUE(RS.)
(RS.)
AR

M AR MR
R
O O
OUTPUT X OUTPUT X
CONCLUSION

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.

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