Elaborate upon the meaning and features of monopolistic competition. How is the output and price determination under monopolistic competition?
Ans:- Meaning of Monopolistic – It is that market where there are a large number of buyers and sellers. Who sells different products for the purpose of control over price and facilitating the increase in market share.
Definition of Monopolistic :- “Monopolistic competition is a market situation where there are many producers but each offers a slightly differentiated product.
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In other words:- There is a location where a large producer sells different products to many buyers. Buyer is unable to compare their buying prices as well as available products.
By gndupapers.online price determination under monopolistic competition
Features of Monopolistic Competition
- Large number of firms and Buyers– There are many large numbers of firms producing different products and also a large number of buyers.
- Product Differentiate :- It refers to that situation where the buyer can distinguish one product from the other.
- Freedom of Entry and Exit:- Under monopolistic firms have freedom of enter and leave as per their will.
- Selling cost:- Many firms advertising for their products with a view to selling more and more.
- Imperfect Knowledge:- Buyers and sellers lack perfect knowledge about the price of the product.
- Non-price Competition:- Another feature of monopolistic competition is that firms may compete with each other without changing the price of the product.
How output and price determination under Monopolistic Competition
Under monopolistic competition every firm would like to get maximum profit. We know that profit is maximum when MR is equal to MC.
Under monopolistic competition, firms have to lower their prices if they want to sell more units of output. A firm produces up to that limit where its marginal cost is equal to marginal revenue under the monopolistic competition.
There are two times under which PRICE determination under monopolistic competition can be made.
- Short Run
- Long Run
- Short Run:- Under the short period no firm can increase or decrease its fixed factor of production such as machines, plants, factory building.
In the short run a firm will be in equilibrium when (i) MC = MR (ii) MC curves cut MR Curve from Below. The profit of a firm depends upon the demand of products and efficiency of the firm. In this time period firms may face three situation
- Super Normal Profit
- Normal profit
- Losses
- Super Normal Profit:-
- By Following graph shows that the firm is in equilibrium at point E. Where at this point MC=MR. This equilibrium price AM is greater than average cost BM. Thus, the firm earns supernormal profit equivalent to the difference between AM and BM. Total super normal profit of the firm in equilibrium is ABCP, the shaded area.
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| Super Normal Profit = AR > AR |
- Normal Profit:- We can understand normal profit with the help of the following diagram.
In the short run a firm may earn Normal Profit. Following graph is in equilibrium at point E Where MC=MR and OM will be in equilibrium output. Price of equilibrium output is OP and Average cost is also OP=AM. Therefore, the AR Curve is touching the AC Curve at point A. Thus, in the position of equilibrium AR is equal to AC and the firm earns normal profit.
| Normal Profit = AR = AC |
- Minimum Loss:- we can analyse with the help of the following diagram.
In the short period firms may have incurred a loss of fixed cost. This is a minimum loss of the firm. The firm will be in equilibrium at point E. At this point MC=MR.
If price or average revenue is less than the average cost ( AR < AC ), The firm will incur minimum loss, However the firm will continue its production as long as the prevailing price covers average variable cost. Hence the firm will incur a loss equivalent to BM – AM = AB per unit. The total loss of the firm will be the shaded area as BAP, P. Which can be understood from the above graph.
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| Minimum Loss = AC – AVC |
2. Long Run Equilibrium in Monopolistic Competition,
How output and price determination under monopolistic competition can be made?
Long run is that period in which a firm can change its production capacity in response to change in demand. In the long run the firm will produce upto that limit where marginal revenue is equal to the long run marginal cost. In the long run firms earn Normal profit. No one firm can get super normal profit in the long run. There are the following reasons.
(I) If a firm earns supernormal profit, then several firms will be attracted to enter into business as free entry. In result of which total supply will be increased in the market. As a result, firms will be deprived of the super normal profit due to the entry of many firms. Because profit will be distributed.
(Il) If new firms will charge lower price for their products for the purpose of maximum sale. The old firms are also required to lower their product price for existing in the market. Due to which profit will be distributed again in new and old firms. Then these firms will get only normal profits.
(Ill) Due to the free entry in industry many firms will enter. In result of which installation cost will be raised. But the prices of their products will be lower. So they will get normal profit instead of super profit.
However, From the above graph we can understand the profit of the firm and equilibrium of the firm in the long Run. Here LAC Long Run Average Cost and LMC Long Run Marginal Cost. AR is an Average Revenue and MR is a Marginal Revenue. Where MC=MR is equal, which is an equilibrium point. OM is the equilibrium output and OP is the equilibrium Price. This is an equilibrium point where AR=LAC. Thus, the firm earns normal profit in the long Run. gndupapers.online
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| Monopolistic Competition |
| MR= LMC |
| Price ( AR ) = LAC but > LMC |
Conclusion:- Now we are able to understand any firm can earn Supernormal Profit, Normal Profit and Minimum Loss in the Short Run. Whereas in the long Run any firm normally earns Normal Profit instead of Super Normal Profit. As in the short Run all factors of production cannot be changed whereas in the Long Run firms can Change their factor of production. How output and price determination under monopolistic competition can be found?
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Essential question of Economics are following. price determination under monopolistic competition