1. Monopolistic Competition

2. Monopolistic Competition
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Between two extremes of monopoly and perfect competition.
“Imperfect competition” derived from the realistic features of
markets a large number of sellers sell heterogeneous or
differentiated products and buyers have preferences for specific
sellers.
Introduced by Joan Robinson and Edward H. Chamberlin.
It is a market situation in which a relatively large number of
producers offer similar but not identical products.
Also termed as “monopolistic”
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Each of these sellers makes the product unique by some
differentiation and has control over the small section of market, just
like a monopolist.

3. Features
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Large number of buyers and sellers
Heterogeneous products
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A differentiated product enjoys some degree of
uniqueness in the mindset of customers, be it real, or
imaginary.
Selling costs
Independent decision making
Imperfect knowledge
Unrestricted entry and exit

4. Demand and MR Curves of a Firm
Price,
Revenue
AR
MR
O
Quantity
Demand curve for a firm
has a negative slope as all
firms sell products which
are close substitutes of
each other.
•If the firm increases the price of its product
slightly, it will lose some, but not all of its
customers
• If it lowers the price slightly, it will gain
some, but not all of the customers of its
rivals.
• This is to say that the demand curve of
the firm will be highly price elastic.
• Slope of demand curve is flatter
• In monopoly it is highly inelastic and slope
is steeper

5. Price and Output Decisions in
Short Run
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Monopoly aspect is observed in the short run.
When product is differentiated, firm has some monopoly
power.
Firms have limited discretion over price, due to the existence
of customer loyalty.
Firm follows MR=MC (when MC is rising) in order to
maximize profit.
Similar to perfect competition, a firm may not necessarily
generate supernormal profits in the short run.
Negative slope of the demand curve is instrumental for
chances of monopoly profits in the short run.
If the firm earns supernormal profit in short run, the reason
would be the reaping of the benefits of supplying a product
which is differentiated, or at least perceived to be different
from the products of rival firms.

6. Price and Output Decisions in Short
Run
Price,
Revenu
e, Cost
P
E
A
MC
B
AC
E
QE
Quantity
MC
AC
B
AR
E
AR
MR
O
Price,
Revenue
, Cost
PE
MR
O
QE
Quantity
Firm maximizes profit at (i) MR=MC (ii) MC cuts MR from below, at point E.
Equilibrium price=OPE ,output = OQE.
Total revenue =
OPEBQE
Total cost = OAEQE
Supernormal profit
= AEBPE, since price PE >
average cost.
Total revenue= OQEBPE.
Total cost = OQEBPE.
Profit = nil.
Firm makes normal profit.

7. Price and Output Decisions in
Short Run
MC
Price,
Revenue
, Cost A
PE
B
Equilibrium point is at E,
Equilibrium level of output
at OQE and price OPE.
AC
C
AR
MR
O
QE
Quantity
Firm earns total revenue = OPECQE .
Cost = OABQE.
Thus the total cost of producing OQE is more than the revenue earned
by selling OQE.
The amount of loss incurred by the firm is given by ABCPE.

8. Price and Output Decisions in Long
Run
Price,
Revenue
, Cost
LMC
B
A
E
PE
MR
QE
If any firm is earning supernormal
profit, this would attract new firms
LAC
to enter the industry in the long run
till all the firms in the market earn
AR
only normal profits.
When some of the existing firms
are making losses, some would
leave the industry due to freedom
to exit the industry, till the firms in
Quantity the market earn only normal profits.