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    Trumo

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    Pratik Bhoir
    1) Under monopolistic competition, firms differentiate their products and there are many small sellers in the market. Each firm produces where marginal cost equals marginal revenue to determine price and output in the short run. 2) In the short run, a firm can earn super normal profits, normal profits, or losses depending on the relationship between average revenue, average cost, and marginal cost curves. 3) In the long run, firms enter and exit the market until all firms earn only normal profits and produce where marginal revenue equals marginal cost.

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    Trumo

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    Pratik Bhoir
    46 views15 pages
    1) Under monopolistic competition, firms differentiate their products and there are many small sellers in the market. Each firm produces where marginal cost equals marginal revenue to determine price and output in the short run. 2) In the short run, a firm can earn super normal profits, normal profits, or losses depending on the relationship between average revenue, average cost, and marginal cost curves. 3) In the long run, firms enter and exit the market until all firms earn only normal profits and produce where marginal revenue equals marginal cost.

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    1) Under monopolistic competition, firms differentiate their products and there are many small sellers in the market. Each firm produces where marginal cost equals marginal revenue to determine price and output in the short run. 2) In the short run, a firm can earn super normal profits, normal profits, or losses depending on the relationship between average revenue, average cost, and marginal cost curves. 3) In the long run, firms enter and exit the market until all firms earn only normal profits and produce where marginal revenue equals marginal cost.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    46 views15 pages

    Trumo

    Uploaded by

    Pratik Bhoir
    1) Under monopolistic competition, firms differentiate their products and there are many small sellers in the market. Each firm produces where marginal cost equals marginal revenue to determine price and output in the short run. 2) In the short run, a firm can earn super normal profits, normal profits, or losses depending on the relationship between average revenue, average cost, and marginal cost curves. 3) In the long run, firms enter and exit the market until all firms earn only normal profits and produce where marginal revenue equals marginal cost.

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    © All Rights Reserved
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    of 15

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    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.
    MINIMUM YLOSS
    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.

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