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MR
Quantity
MR
Quantity
Q*
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 8– 6
PROFIT MAXIMIZATION IN
SHORT RUN (cont.)
Monopolistic competitive firm at break-even
Normal profit or break-even is The profit maximization
earned when TR = TC. level occurs where MR
curve and MC curve
Price (RM) At this output, monopolistic intersects at Point A.
MC
competitive firm is at the break-
even or earns normal profit. ATC
AC/ P*
DD = AR
MR
Quantity
Q*
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 8– 7
PROFIT MAXIMIZATION IN
SHORT RUN (cont.)
Monopolistic competitive firm suffers economic losses
Economic losses or subnormal At this output, monopolist suffers economic losses
profit is the losses incurred by a or subnormal profit equal to the shaded area.
monopolistic competitive firm when
Price (RM) ATC
MC
TR < TC.
DD = AR
MR
Quantity
Q*
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 8– 8
PROFIT MAXIMIZATION IN
LONG RUN
Monopolistic competitive firm earns normal profit in long
run
A monopolistic competitive
firm earns normal profit in
Price (RM) the long run due to free LRMC
entry and exit.
LRATC
P*
DD = LRAR
LRMR
Q*
Quantity
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 8– 9
OLIGOPOLY
Definition
– Market structure in which there are only a few firms selling
either standardized or differentiated products and it restricts
the entry into and exit from the market.
Characteristics
– Few numbers of firms – the number of firms is small but
size of the firms is large.
– Homogeneous or differentiated product
– Mutual interdependence – firms in an oligopoly market
always consider the reaction of their rivals when choosing
price, sales target, advertising budgets and other business
policies.
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 8– 10
OLIGOPOLY (cont.)
P*
dd
DD
Q* Quantity
MC1
MC2
E
P*
b DD
Q*
MR Quantity
Four assumptions:
(1) there are two firms and no other firms can enter
the market,
(2) the firms have identical costs,
(3) they sell identical products, and
(4) the firms set their quantities simultaneously.
Non-price Competition
– Non-price competition is the means for growing market
share and profitability in the face of new rivals through
advertising, marketing, after sales service, free gift and
others.
– The difference with price cuts by oligopoly firm and non-
price competition.
– Opting for price cut – If a firm reduces a price of a product,
it can attract customers, and establish in the industry.
• Reactions of competitors – the reaction from rivals are quick
by reducing their prices. There is a risk of price war if the price
reduction continues. However, customers are better off.