2. CHARACTERISTICS
1) Many small sellers
2) Differentiated product
3) Easy entry and exit
4) Practice non-price competition
5) Limited control over its price
3. DEMAND & REVENUE
Good slightly differentiated →
firm has some influence/control
over P → downward sloping dd
curve & very elastic → bec the
large number of firms and
closeness of substitutes.
Bec P is not constant → D=P=AR
but AR ≠ MR
5. SHORT-RUN EQUILIBRIUM
Equil (max profit): MC = MR
In SR, firms can earn 3 types of
profits.
Diagrams are the same as in
monopoly
a) Supernormal Profit
TR > TC
AR > AC
6. b) Normal Profit
TR = TC
AR = AC
b) Subnormal Profit
TR < TC
AR < AC
7. LR EQUILIBRIUM
Firms get only normal profit bec no
barrier to entry.
Stage I – gets supernormal profit in
SR → attract new firms to enter →
firms ↑ non-P competition & prodn →
S ↑, cost ↑ & D/P ↓ → revenue ↓
Stage II – gets normal profit only →
no new firms attracted to enter
LR equil: MR = SMC = LMC
9. COMPARISON WITH PERFECT
COMP.
Price → PMC > PPC
Q → QMC < QPC
AC → ACMC > ACPC → allocation of
resources is less efficient in MC
10. PRODUCT VARIATION &
SELLING EXPENSES
Firms slightly change characteristics of
the product to attract buyers.
Advertisement is used → selling
expenses ↑.
Product variation & selling exp can ↑
sales and profits but cost also ↑.
If MR > MC, firms can ↑ exp on
product variation until MC = MR.
11. EFFECTS OF ADVERTISING IN
MONO. COMP.
Revenue,
Cost (RM)
MC
AC2
P2
P1
AC1
C2
E2 D2=P2
C1
E1
D1=P1
MR1 MR2
0 Q1 Q2 Quantity
12. ECONOMIC INEFFICIENCY
Firms produce at o/p level where P
> MC.
However, deadweight loss in MC is
not as large as in monopoly bec D
curve is more elastic.
In LR, firm does not produce o/p at
min AC.
However, consumers gain from
product differentiation (wide variety
of products)
