PRICE AND OUTPUT

DETERMINATION UNDER
MONOPOLISTIC
COMPETITON
MONOPOLISTIC COMPETITION
Monopolistic competition is a market structure in
which there are many sellers of a commodity,
but the product of each seller differs from that
of the other sellers in one respect or the other.
According to J.S. Basins, “monopolistic
competition is market structure where there is a
large number of small sellers, selling
differentiated but close substitute products.”
 CHARACTERISTICS OF
MONOPOLISTIC COMPETITION
 Large number of firms and buyers
 Product differentiation
 Freedom of entry and exit of firms
 Selling costs
 Price control
 Limited mobility
 Imperfect knowledge
 Non-price competition
DETERMINATION OF PRICE AND
OUTPUT UNDER MONOPOLISTIC
COMPETITION
Firm under monopolistic competition
produces up to that limit where its
marginal cost is equal to marginal
revenue, (MC=MR) and MC curve cuts MR
curve from below. In case of monopolistic
competition, price and equilibrium position
of firm and group will be studied in two
parts: (1)Firm’s equilibrium and (2)
Group’s equilibrium.
 EQUILIBRIUM OF THE FIRM

SHORT PERIOD LONG PERIOD

SUPER NORMAL
NORMAL MINIMUM
NORMAL PROFIT
PROFIT LOSS
PROFIT
SHORT PERIOD EQUILIBRIUM

Short-run refers to that time period in

which output can only be increased by
changing the quantity of variable factors.
there is no time to change in fixed factors
of production like machines, plants,
factory, building etc.
 SUPER NORMAL PROFIT
Y
MC
AC
A
P
C B
REVENUE

E AR

MR
O X
M
OUTPUT
Firm is in equilibrium at point E, because at this point MC=MR.
Point E indicates that the firm’s equilibrium output is OM. Price of
equilibrium output is OP(=AM). AM is greater than the BM. Hence
the firm earns super normal profit equivalent to difference
between AM and BM. Total super normal profit is ABCP.
 NORMAL PROFIT
Y MC

AC
A
P
REVENUE

E
AR

MR
O
M X
OUTPUT
Firm is in equilibrium at point E where MC=MR and OM will be
equilibrium output. Price of the equilibrium output is OP(=AM)
and average cost is also OP(=AM). It is so because, AR curve is
touching AC curve at point A. Hence AR=AC and firm earns
normal profit.
 Y MINIMUM LOSS
LOSS SAC AVC
MC

P B
REVENUE A
P1

E MR=MC
AR
MR
O M X
OUTPUT

In this firm will be in equilibrium at point E and MC=MR. Price of

equilibrium output OM is OP1(=AM) and average cost OP(=BM)
and AC>AR. Hence a firm suffer a loss equivalent to BM-AM=AB
per unit. But price of equilibrium output OM=AVC as AVC touches
curve AR at point ‘A’ and at point A firm will have to incur loss of
fixed cost equivalent to AB per unit then the total
loss of firm will be BAP1P.
 LONG PERIOD EQUILIBRIUM

Long period refers to that time period in

which output can be increased by making
changes in the quantity of both fixed as
well as variable factors inputs. In long run
each firm will produce up to that limit
where MR=long run MC. In long run firm
earn only normal profit.
 NORMAL PROFIT
Y
LMC

LAC
A
REVENUE P

E MR=MC AR

MR

O X
M
OUTPUT
In this MC=MR at point E which is
equilibrium point. OM is equilibrium output
and OP(=AM) is the price equilibrium
output. At equilibrium output OM, average
revenue curve is tangent to LAC curve at
point A which means AR=LAC. Hence
firms earns only normal profit.
 COMPARISON BETWEEN
MONOPOLISTIC AND PERFECT
COMPETITION
 Assumption regarding product
 Assumption regarding number of buyers and
sellers
 Assumption regarding degree of knowledge
 Implication regarding decision
 Implication regarding condition of maximum
profit
 Comparison regarding price
 Comparison regarding profit
  Assumption regarding shape of demand
curve REVENUES CURVES
REVENUE CURVE UNDER Y UNDER MONOPOLISTIC
Y
PERFECT COMPETITION COMPETITION

AR=MR REVENUE(RS.)
P
REVENUE

MR AR
O
O X OUTPUT X
OUTPUT
  Comparison regarding output
LAC
Y Y LMC
LMC
LAC
P B
E
REVENUE P AR=MR
P
P1
A
REVENUE

E AR
NORMAL
PROFIT
MR
O Q X O M N X
OUTPUT OUTPUT
 COMPARISION BETWEEN
MONOPOLISTIC COMPETITION
AND MONOPOLY
 Assumption regarding product
 Assumption regarding number of sellers
and buyers
 Assumption regarding entry
 Assumption regarding degree of
knowledge
 Implications regarding decisions
 Comparison regarding profit
  Different average and marginal revenue
curves REVENUE CURVES UNDER
Y Y MONOPOLISTIC
REVENUE CURVES UNDER COMPETITION
MONOPOLY
REVENUE
REVENUE(RS.)
(RS.)
AR

MR AR MR

O O
OUTPUT X OUTPUT X
 CONCLUSION

In monopolistic competition every firms

enjoys super normal profit, normal profit,
minimum loss in short run but in long run
a firm enjoys only normal profit.