DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : A. Satya Vani Kumari
Designation : Lecturer
Institute : Govt.poly For Women, Suryapet.
Branch : Commercial and Comp. practice
Semester : III year / V Semester
Subject : Business Economics —I
Sub-Code : CCP-502
Topic : Markets
Duration : 50 minutes
Sub Topic : short-run and long- run Price and
output determination under
Moanopolistic Competition
Teaching Aids : PPT, animation
CCP.502.72 1
Objectives

On completion of this period, you would be

able to:
 Explain how to determine short- run and long-run
price and output under Monopolistic Competition.

CCP.502.72 2
Recap:

so far, we have discussed about:

 Pricing under monopoly, and Duopoly

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Monopolistic Competition:
 Large no. of sellers and buyers
 Product differentiation
 Free entry / exit of firm
 Selling costs become integral part of Monopolistic

 Competition
 Two dimensional competition
 Concept of group exists

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Short-run Equilibrium of Firm Under
Monopolistic Competition

 The firm under monopolistic competition is a

price-maker.
 It sets the price which yields maximum profits.
(Represented in Fig.1)

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Fig:1

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Graph Explanation
 The demand curve is the average revenue curve
slopes downward represented by ‘SAR’.

 ‘SMR’ is short-run marginal revenue curve which

lies below ‘SAR’ curve.

CCP.502.72 7
 Contd..

The firm will be in equilibrium at the point

where MC curve intersects MR curve from below
that means:
 MC = MR
 Price is ‘P’ , a perpendicular line from ‘Q’ to SAR
corresponding to ‘Y’ axis.
 At this equilibrium price & output, the firm earns
supernormal profits represented by ‘PABC’.

CCP.502.72 8
Assumptions
 All other firms in the group are in equilibrium with
respect to prices, varieties of product and sales
outlays.
 The given firm also had same variety of product
and constant sales expenditure.
 The firm is rational in determining price which
gives maximum profit.

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 The demand curve of a firm under
monopolistic competition depends on two factors:

 Number of firms in the group

 The extent of product differentiation

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2. If the group has a large number of firms and the
product differentiation is relatively weak, the
demand curve of each firm will be highly elastic.

4. If the group is relatively small and the product

differentiation is prominently significant then the
demand curve of each firm will be less elastic.

CCP.502.72 11
Long-run Equilibrium of Firm under
Monopolistic Competition

 As the firms under monopolistic competition earn

super normal profits in the short-run, new firms
are attracted to the industry as the Group is
open.

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 Contd..

 Because of rival’s entry, the demand curve of the

typical firm shifts to the origin and demand tends
to be more elastic.
 The market share of the firm is reduced due to
competition from increasing number of close
substitutes.

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 So, in the long-run abnormal / super normal
profits cease and the firms earn normal profits
only.
(Represented in Fig.2)

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2

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 Graph Explanation

 ‘OQ’ is equilibrium level of output at which

LMC = LMR.
 At this equilibrium output, the LMR curve is
tangent to the LAC curve at point ‘D’.
 So, ‘PQ’ , the price is equal to average cost.

CCP.502.72 16
 Contd..

 The area ‘OPQA’ is the total revenue as well as

total cost.
 So, the firm earns only normal profit ( as Total
Revenue = Total Cost) in the long-run.
 So, any output less than ‘OQ’ level implies that
AR < AC indicating a loss.
 Similarly any output more than ‘OQ’ means P <
AC indicating loss.

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Exceptions To The
Long-run Normal Profits
Even in the long-run, some firms under monopolistic group
can earn abnormal profits because of :

 High product differentiation

 Specific reputation for the firm in the market
 Possessing unique location
 Financial barriers to the new entrants etc

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 Due to severe competition from rivals because of
unrestricted entry to new firms, abnormal profits in
the long-run will be competed away.

 The firms seek to earn pure economic profits by

advertising, product differentiation etc., that
means, the firms will resort non-price competition.

CCP.502.72 19
Summary

In this class we have discussed about:

 Short-run & Long-run price & output determination

under Monopolistic Competition.

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Frequently Asked Questions

1. Explain with diagrams how price & output are

determined both in the short-run and long-run for a
firm under Monopolistic Competition.

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