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PRICE AND OUTPUT
DETERMINATION UNDER
IMPERFECT COMPETITION
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DEFINING MARKET
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Market :- In economics sense ,
market is a system by which buyers
and sellers bargain for the price of a
product , settle the price and
transact their business buy and
sell a product.
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STRUCTURE OF MARKET
Market
structure
No. of firm and
degree ofproduction diff.
Nature of ind.
Where prevalent
Control
overprice
Method of
marketing
1) Perfect
competition
Large no. of firms
with
homogeneous
product
Financial market
and some farm
products
None Market
exchange or
auction
2 )Imperfectcompetition
a)
Monopolistic
Many firm with
real or perceived
product
differentiation
Manuf. Tea ,shoes
,TV sets etc.
Some
Competitive
advertising
quality rivalry
b) Oligopoly Little or no
product
differentiation
Aluminum, Steel,
cigarette , cars,
Some Competitive
advertising
quality rivalry
c) Monopoly A single producer
, without close
substitute
Public utilities ,
electricity, railway
Consider
able but
usuallyregulated
Promotional
advertising if
supply is large
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IMPERFECT OR MONOPOLISTIC
COMPETITION
MEANING:-
In real life, we experience imperfect
competition, which is in between situation of
perfect competition and monopoly . Imperfectcompetition has been termed as monopolistic
competition.
a state of affairs in which there is large
number of sellers selling non homogeneous orslightly differentiated products in which
there is freedom of entry - exists.4
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DEFINITION
The term monopolistic competition refers tothe market structure in which the sellers do have amonopoly (they are the only sellers) of theirproduct, but they are also subject to a substantialcompetition pressures from sellers or substituteproducts.
-Baumol
Monopolistic competition is a marketsituation in which there are many sellers of
particular product but the product of each selleris in some way differentiated in the minds ofconsumer from the product of other sellers.
- Leftwitch5
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CHARACTERISTICS OF IMPERFECT
COMPETITION
More sellers- There are large no.of sellers of products but
none controls the major portion of the total output
Differentiated Product-various firms under monopolisticcompetition bring differentiated products which are
relatively close substitutes of each other but not perfect
substitutes
Easy Entry or Exit of Firms-there is easy entry and exit of
the firm in monopolistic competition
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CONTD.
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Free Pricing Policy of Firm-In monopolistic
competition , the firms have differenciated
products so it has control over its prices
Nature of revenue curves and cost curves-no
single firm controls more than a small portion of
the total output.. The demand curve of the firm
is neither perfectly elastic nor rigidly inelastic
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o AR and MR are the curve of the firm .the average
revenue tends to be quite elastic because of the
product differentiation and total no of firms operatingin that group
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DIFFERENTIATING BETWEEN :-MONOPOLISTIC COMPETITION & PERFECT
COMPETITION
MONOPOLISTIC
COMPETITION
PERFECT COMPETITION
1. Products are differenciated,
products are generally
differenciated by brandname, trade mark, design
,colour, after sales services
1. Product are homogeneous.
2 .In monopolistic competition,
firms decision making and
behaviour is not absolutelyindependent of each other.
2. Decision making in firms is
independent of other firms..
3. In monopolistic competition,
no of sellers is large but limited
3. No of sellers is very large
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PRICE AND OUTPUT
DETERMINATION IN SHORT RUN
The analysis of short period equillibrium of a
firm under monopolistic competition is based on
the following assumptions:
Large no of sellers who behave independently. Product of each seller is different
The firm has determined demand curve which is
elastic
No new firms enter the industry in short periodsituation
Short run cost curves of each firms differ from
the other..10
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PRICE AND OUTPUT DETERMINATION
IN SHORT RUN
Unit-Cost
&
revenue
D
C
O Q X
Y
N
MR
AR
SACSMC
OUTPUT
P
M
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DIAGRAM EXPLAINATION
The diagram gives short run revenue and cost
curves faced by monopolistic competition
As shown in the figure, firms MR(marginal
revenue) intersects MC(marginal cost) at point N This point fulfills the necessary conditions of
profit maximization at point OQ
Given the demand curve , this output can be sold
at price PQ ,so the price is determined at PQ.
At this output and price ,the firm earns a
maximum monopoly or economic profit equal to
PM per unit of output and a total monopoly profit
shown by the rectangle CDPM12
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CONTD.
The economic profit exists in short run because
there is no or little possibility of new firm
entering in the market..
The rate of profit would not be the same for allfirms under monopolistic competition because of
difference of elasticity of demand of product
There are 3 situations in short run period-
situation of super profit, situation of profit and
situation of loss
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CONTD.
Super Profit making situation: when individual
firms revenue will be greater than its
cost(AR>AC)
Profit making situation: when the firms averagerevenue will be equal to its average cost the
situation is called normal profit(AR=AC)
Loss situation: a firm will earn loss when its cost
is greater than its revenue(AR
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PRICE AND OUTPUT DETERMINATION IN
THE LONG RUN
In the long period the price and output policy of
an individual firm is determined by one general
principal where marginal revenue and marginal
cost are equal to each other
In long period the individual firm as well as the
group as a whole remain stable equillibrium
To achieve the full equillibrium in the long run 2
adjustments have to be made
1. all the quantity offered for sale must be equal
to its demand in the market at a given price
2. entry and exit in response to the general
position of the existing firm15
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Price
Output
M
P
Profit
T
LMCLAC
E
EI
AR(P)
MR
O Q
Y
X
Diagram
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DIAGRAMATIC EXPLANATION
AR and MR are the average revenue and
marginal revenue curve of the firm.
LMC and LAC are the long period marginal cost
curve .every firm equates its marginal cost to itsmarginal revenue
In the diagram , E1 is the point of equillibrium
when the new entry of the firm is restricted then
the firm enjoys super normal profits with the OQ
level of output as OP is the price and EQ or OM
is the cost per unit of product and difference
between the two shows the profit situation. Equal
to the area MPTE 17
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CONTD.
Thus MPTE is the super normal profit of a firm under
long period situation when the entry of the new firm is
restricted but this profit situation will attract other firms
to enter..
In monopolistic competition, following two situations
arise in the long period
1)Free entry of firm 2)Restricted entry of the firm
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