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Home Price and Output Determination Under Monopolistic Competition Short Run Equilibrium Under Monopolistic Competition


Short Run Equilibrium Under Monopolistic/Imperfect Competition:  


Monopolistic competition refers to the market organization where there are a fairly large number of firms which sell somewhat differentiated products.


A single firm in the product group (industry) has little impact on the market price. However, if it reduces price, it can expect a considerable increase in its sales. The firm may also attract buyers away from other firms by creating imaginary or real difference through advertising, branding and through many other sales promotion measures (non-price competition). If the firm raises its price, it will not lose all its customers. This is because of the fact that the product is differentiated from competing firms due to price and non-price factors. The demand curve (AR curve) of the monopolistic firm is therefore, highly elastic and is downward sloping. As regards the marginal revenue curve, it slopes downward and lies below the demand curve because price is lowered of all the units to sell more output in the market.


Firm's Equilibrium Price and Output:


In the short-run, the number of firms in the 'product group' remains the same. The size of the plant of each firm remains unaltered. The firm whether operating under perfect competition, or monopoly wants to maximize profits. In order to achieve this objective, it goes on producing a commodity so long as the marginal revenue is greater than marginal cost. When MR = MC, it is then in equilibrium and produces the best level of output. If a firm produces less than or more than the MR = MC output, it will then not be making maximum of profits.


In the short-run, a monopolistically competitive firm may be realizing abnormal profits or suffering losses. If it is earning profits, no new firms can enter the industry in the short-run. In case, it is suffering, losses but covering full variable cost, the firm will continue operating so that the losses are minimized. If the full variable cost is not met, the firm will close down in the short-run. The short-run equilibrium with profits and short run equilibrium with losses of a monopolistically competitive firm are explained with the help of two separate diagrams as under.





In the figure (17.1), the downward sloping demand curve (AR curve) is quite elastic. The MR curve lies below-the average curve except at point N. The SMC curve which includes advertising and sales promotional costs is drawn in the usual fashion. The SMC curve cuts the MR curve from below at point Z. The firm produces and sells an output OK, as at this level of output MR = MC. The firm sells output OK at OE/KM per unit price. The total revenue of the firm is equal to the area OEMK, whereas the total cost of producing output OK is OFLK. The total profits of the firm are equal to the shaded rectangle FEML. The firm earns abnormal profits in the short run.


Short Run Losses:


If the demand and cost situations are not favorable in the market, a monopolistically competitive firm may incur losses in the short-run. The short-run equilibrium of the firm with losses is explained with the help of a diagram.





In the Figure (17.2), marginal cost (SMC) equates marginal revenue MR curve from below at point Z. The firm produces output OK and sells at OF/KT per unit-price. The total receipt of the firm is OFTK. The total cost of producing output OK is equal to OEMK. The firm suffers a net loss equal to the area FEMT on the sale of OK output.


Relevant Articles:


Historical Background of Monopolistic Competition
What is Monopolistic/Imperfect Competition
Characteristics of Monopolistic/Imperfect Competition
Short Run Equilibrium Under Monopolistic/Imperfect Competition
Equilibrium Price and Output in the Long Run Under Monopolistic/Imperfect Competition
Wastes of Monopolistic/Imperfect Competition

Price and Output Determination Under Oligopoly

Pricing and Output Determination Under Duopoly
Three Important Models of Oligopoly

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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