25969174 price and output determination under monopolistic on

8/2/2019 25969174 Price and Output Determination Under Monopolistic on

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PRICE AND OUTPUT

DETERMINATIONUNDER

MONOPOLISTICCOMPETITON


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MONOPOLISTICCOMPETITION

Monopolistic competition is

a market structure in whichthere are many sellers of acommodity, but the product of each seller differs from that of

the other sellers in one respector the other. According to J.S. Basins,

monopolistic competition ismarket structure where thereis a large number of smallsellers, selling differentiatedbut close substitute products.


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CHARACTERISTICS OF

MONOPOLISTICCOMPETITION

Large number of firms and

buyersProduct differentiationFreedom of entry and exit of firmsSelling costsPrice controlLimited mobilityImperfect knowledgeNon-price competition


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DETERMINATION OFPRICE AND OUTPUT

UNDER MONOPOLISTICCOMPETITION

Firm under monopolistic

competition produces up tothat limit where its marginalcost is equal to marginalrevenue, (MC=MR) and MC

curve cuts MR curve frombelow. In case of monopolisticcompetition, price andequilibrium position of firm andgroup will be studied in twoparts: (1 )Firms equilibriumand (2) Groups equilibrium.


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EQUILIBRIUM OF THEFIRM

LONG RUNSHORT RUN

SUPER

NORMALPROFIT

NORMALPROFIT

MINIMUMLOSS

NORMAL

PROFIT


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SHORT PERIODEQUILIBRIUM

Short-run refers to that

time period in which outputcan only be increased bychanging the quantity of variable factors. there is notime to change in fixed factorsof production like machines,plants, factory, building etc.


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SUPER NORMAL

PROFIT

O

E

B

MC A

C

A R

MR X

Y

M

CP

Firm is in equilibrium at point E, becauset this point MC=MR. Point E indicates that therms equilibrium output is OM. Price of quilibrium output is OP(=AM). AM is greaterhan the BM. Hence the firm earns super normal

rofit equivalent to difference between AM andBM. Total super normal profit is ABCP.

REVENUE

OUTPUT

A


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NORMAL PROFIT

M XO

P

A

MC

AC

A R

MR

E

Y

REVENUE

OUTPUT

Firm is in equilibrium at point E whereMC=MR and OM will be equilibrium output. Pricef the equilibrium output is OP(=AM) andverage cost is also OP(=AM). It is so because,

AR curve is touching AC curve at point A. HenceAR=AC and firm earns normal profit.


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MINIMUM LOSS

O M X

P1

P

MR

AR

MC

B

A

Y

AVCSAC

E MR=MC

OUTPUT

REVENUE

LOSS

In this firm will be in equilibrium at point E and MC=MR.rice of equilibrium output OM is OP 1(=AM) and average costP(=BM) and AC>AR. Hence a firm suffer a loss equivalent toM-AM=AB per unit. But price of equilibrium output OM=AVC asVC touches curve AR at point A and at point A firm will have tocur loss of fixed cost equivalent to AB per unit then the total

ss of firm will be BAP1P.


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LONG PERIODEQUILIBRIUM

Long period refers to that

time period in which outputcan be increased by makingchanges in the quantity of bothfixed as well as variable factorsinputs. In long run each firmwill produce up to that limitwhere MR=long run MC. In

long run firm earn only normalprofit.


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NORMAL PROFIT

OM

X

P

LMC

LAC

Y

AR

MR

A

E MR=MC

OUTPUT

REVENUE


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In this MC=MR at point Ewhich is equilibrium point. OMis equilibrium output andOP(=AM) is the priceequilibrium output. At

equilibrium output OM,average revenue curve istangent to LAC curve at point

A which means AR=LAC.Hence firms earns only normalprofit.


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CONCLUSION

In monopolistic competition

every firms enjoys supernormal profit, normal profit,minimum loss in short run butin long run a firm enjoys onlynormal profit.

25969174 price and output determination under monopolistic on

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