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  • 1. Monopolistic Competition
  • 2. Monopolistic Competition      Between two extremes of monopoly and perfect competition. “Imperfect competition” derived from the realistic features of markets a large number of sellers sell heterogeneous or differentiated products and buyers have preferences for specific sellers. Introduced by Joan Robinson and Edward H. Chamberlin. It is a market situation in which a relatively large number of producers offer similar but not identical products. Also termed as “monopolistic”  Each of these sellers makes the product unique by some differentiation and has control over the small section of market, just like a monopolist.
  • 3. Features   Large number of buyers and sellers Heterogeneous products      A differentiated product enjoys some degree of uniqueness in the mindset of customers, be it real, or imaginary. Selling costs Independent decision making Imperfect knowledge Unrestricted entry and exit
  • 4. Demand and MR Curves of a Firm Price, Revenue AR MR O Quantity Demand curve for a firm has a negative slope as all firms sell products which are close substitutes of each other. •If the firm increases the price of its product slightly, it will lose some, but not all of its customers • If it lowers the price slightly, it will gain some, but not all of the customers of its rivals. • This is to say that the demand curve of the firm will be highly price elastic. • Slope of demand curve is flatter • In monopoly it is highly inelastic and slope is steeper
  • 5. Price and Output Decisions in Short Run        Monopoly aspect is observed in the short run. When product is differentiated, firm has some monopoly power. Firms have limited discretion over price, due to the existence of customer loyalty. Firm follows MR=MC (when MC is rising) in order to maximize profit. Similar to perfect competition, a firm may not necessarily generate supernormal profits in the short run. Negative slope of the demand curve is instrumental for chances of monopoly profits in the short run. If the firm earns supernormal profit in short run, the reason would be the reaping of the benefits of supplying a product which is differentiated, or at least perceived to be different from the products of rival firms.
  • 6. Price and Output Decisions in Short Run Price, Revenu e, Cost P E A MC B AC E QE Quantity MC AC B AR E AR MR O Price, Revenue , Cost PE MR O QE Quantity Firm maximizes profit at (i) MR=MC (ii) MC cuts MR from below, at point E. Equilibrium price=OPE ,output = OQE. Total revenue = OPEBQE Total cost = OAEQE Supernormal profit = AEBPE, since price PE > average cost. Total revenue= OQEBPE. Total cost = OQEBPE. Profit = nil. Firm makes normal profit.
  • 7. Price and Output Decisions in Short Run MC Price, Revenue , Cost A PE B Equilibrium point is at E, Equilibrium level of output at OQE and price OPE. AC C AR MR O QE Quantity Firm earns total revenue = OPECQE . Cost = OABQE. Thus the total cost of producing OQE is more than the revenue earned by selling OQE. The amount of loss incurred by the firm is given by ABCPE.
  • 8. Price and Output Decisions in Long Run Price, Revenue , Cost LMC B A E PE MR QE If any firm is earning supernormal profit, this would attract new firms LAC to enter the industry in the long run till all the firms in the market earn AR only normal profits. When some of the existing firms are making losses, some would leave the industry due to freedom to exit the industry, till the firms in Quantity the market earn only normal profits.