1monopolistic competition
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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?