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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
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.
Large number of buyers and sellers
A differentiated product enjoys some degree of
uniqueness in the mindset of customers, be it real, or
Independent decision making
Unrestricted entry and exit
Demand and MR Curves of a Firm
Demand curve for a firm
has a negative slope as all
firms sell products which
are close substitutes of
•If the firm increases the price of its product
slightly, it will lose some, but not all of its
• If it lowers the price slightly, it will gain
some, but not all of the customers of its
• 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
Price and Output Decisions in
Monopoly aspect is observed in the short run.
When product is differentiated, firm has some monopoly
Firms have limited discretion over price, due to the existence
of customer loyalty.
Firm follows MR=MC (when MC is rising) in order to
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.
Price and Output Decisions in Short
Firm maximizes profit at (i) MR=MC (ii) MC cuts MR from below, at point E.
Equilibrium price=OPE ,output = OQE.
Total revenue =
Total cost = OAEQE
= AEBPE, since price PE >
Total revenue= OQEBPE.
Total cost = OQEBPE.
Profit = nil.
Firm makes normal profit.
Price and Output Decisions in
, Cost A
Equilibrium point is at E,
Equilibrium level of output
at OQE and price OPE.
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.
Price and Output Decisions in Long
If any firm is earning supernormal
profit, this would attract new firms
to enter the industry in the long run
till all the firms in the market earn
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.