Price and Output Determination in Monopolistic Competition.pdf

Price and output determination in monopolistic competition market

1. PRICE AND OUTPUT
DETERMINATION IN
MONOPOLISTIC COMPETITION
Submitted to-Prof. S.L Kaushal
By-VipenThakur
Roll no. –22121
MBA1
st
Sem

2. WHAT IS MONOPOLISTIC COMPETITION?
Monopolistic competition refers to a market situation where there are many
firms selling a differentiated product.
“There is competition which is keen, though not perfect, among many firms
making very similar products.”
No firm can have any perceptible influence on the price-output policies of the
other sellers nor can it be influenced much by their actions.
Thus monopolistic competition refers to competition among many firms selling
closely related but not identical products.
Products are close substitutes with a high cross-elasticity and not perfect
substitutes. Tata, Lipton, etc. tea; Hamam, Lux etc. soap; Pepsi, Coca Cola, etc.
cold drinks are examples of product differentiation. Under monopolistic
competition, no single firm controls more than a small portion of the total
output of a product.

3. HOW ARE PRICES DETERMINED IN A
MONOPOLISTIC COMPETITIVE MARKET?
Monopolistic competition is the marketplace where there are large number of sellers
but less in comparison to theperfect competition. There is a product differentiation
of products. All the firms are price makers. Prices in a monopolistic competitive
market are determined by the interaction of supply and demand.

4. CONDITIONS FOR THE PRICE AND OUTPUT
DETERMINATION IN MONOPOLISTIC COMPETITION
EQUILIBRIUM OF AN INDIVIDUAL FIRM
1.Marginal Cost = Marginal Revenue, and MC = MR
2.There must be an intersection of the MR curve and MC curve from below.

5. SHORT-RUN PRICE AND OUTPUT DETERMINATION IN
MONOPOLISTIC COMPETITION AND EQUILIBRIUM OF THE
INDUSTRY
The analysis in the short-run of the firm under monopolistic competition is based on some
assumptions. These assumptions are as follows:
1.There are large numbers of sellers who act independently of each other. These sellers are
monopolists in their sphere.
2.Each seller’s product shows differentiation from other products.
3.A firm attains a determinate elastic demand curve (AR).
4.A perfectly elastic supply of factor services to produce the question product.
5.Each firm’s short-run cost curves differ from each other.
6.There is a restriction to entering new firms in the industry.

6. EXPLANATION
Under these assumptions, each firm’s price and output are fixed to maximize profits. There is
an equilibrium point of price and output at which the Short-Run Marginal Cost (SMC) equals
marginal revenue. Since, in the short-run Price and Output Determination in monopolistic
competition, there is a difference in cost, the firm with lower unit costs earns only average
profits. There will be a loss if it can cover the average variable cost.

7. 1. Supernormal Profit
In figure, the SMC (short-run marginal cost) curve cuts the MR curve
at point E. This point E shows the output OQ and price QA (= OP).
This results in the firm earns supernormal profit, represented by the
area PABC.
2. Normal Profit
In figure, the SMC (short-run marginal cost) curve cuts the MR curve
at point E. This point E shows the output OQ and price QA (= OP).
This results in the firm earns supernormal profit, represented by the
area PABC.

8. 3. Minimum Loss
Figure represents a condition where the firm cannot cover its short-run average
unit cost and thus incurs losses. The equality of MR and SMC curves helps to set
the price at point E, and the price is QA which occupies the average variable cost
only. At point A, the tangency of AVC (the average variable cost curve) and the
demand curve D make it a shutdown point. When the price is lowered below QA
by the firm, then the firm will stop further production. However, there will be a
loss to the firm at this price equal to area CBAP during the short-run in the hope
of cost lowering in the long run. It is the price and output determination in
monopolistic competition.

9. LONG-RUN PRICE AND OUTPUT DETERMINATION IN MONOPOLISTIC
COMPETITION AND EQUILIBRIUM OF THE INDUSTRY
There is exit and entry of the firms in the long run in a monopolistic competitive industry. The
process of adjustment will lead to the existence of average profits only. In the long run, this is a
realistic assumption for price and output determination in monopolistic competition that no
firm can incur losses or earn supernormal profits. It is because of similar products in the
market.
In a monopolistic competitive industry, if the firms in the short-run earn supernormal profits,
there will be an incentive to enter new firms. Profits per firm will keep decreasing with the
entry of more firms as there will be sharing of product demand among many firms. It happens
till wiping off all profits, and then all firms earn only average profits.

10. Thus, it is clear that all firms will earn only average profits
in the long run. In figure 6.21, in the long run, all firms are
at equilibrium at point E where (1) LMC = MR, (2) MR is cut
by LMC from below, and the curve LAC is tangent at point A
to the D/AR curve. Since at point A, price-QA = LAC, average
profits are earned by each firm, and there is no tendency for
firms to enter or exit the industry.

11. REFERENCES
•Principles Of Micro Economics –H L Ahuja
•https://studynotesexpert.com
•https://www.yourarticlelibrary.com

12. THANK YOU