MONOPOLISTIC COMPETITION

Perfect competition , where all goods are homogenous and all firms are price takers , is

rarely seen. Imperfect competition is very common . In this kind of a market , there are few sellers and product differentiation and price wars

Differences between monopolistic and perfect

competition. While firms in a monopolistic markets are

price dictators , in perfect competition they are price takers.

The demand curve for a market based on perfect competition is a horizontal straight

line, while in imperfect competition the demand curve slopes downwards from left to

right

Differences between monopolistic and perfect competition.

In perfect competition there is constant returns to scale, while imperfect competition is based on the the principal of increasing returns to scale.

Under perfect competition increase in output is equal to increase in input. But under imperfect competition , an increase in input leads to more

than proportionate increase in output.This allows some firms to occupy a dominant position in the industry. These firms set the price for the entire

industry

Characteristis of mperfect competition

An imperfect market can be defined as a market with many producers offering goods which are

close substitutes, but not identicals as is the case in the perfect competition. Since the products vary in their features , the pricing also varies.

Under imperfect competition sellers try to differentiate their products mainly on the basis of

four aspects

• Physical features

• Location

• Services

• Product image

Market structure characteristics of monopolistic competition

• Number and size distribution of sellers

• Number and size distribution of buyers

• Product differentiation

• Conditions of entry and exit

• Many small sellers. Actions of individual sellers go unheeded by other firms

• Many small buyers

• Slightly differentiated. Product of one firm is a close substitute for that of other sellers

• Easy entry and exit

Profit –maximizing price and output in the short run

price

p

MC AC

D

MR

Qc

Long run profit maximization in the monopolistic competition

mc ac

Pc

The manager of a firm has the following demand equation given by

P=309.75-Q and the long run cost equation is TC=400Q-

20Q2+Q3Where Qis quantity. What is the long run equilibrium price and

quantity how much economic profit will the firm earn?