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Azhar

The document discusses monopolistic competition, including its assumptions, short run and long run equilibrium, and how it differs from perfect competition. Monopolistic competition has many small firms that produce differentiated but substitutable products, with free entry and exit in the long run. In the short run, firms set price along their demand curve where marginal revenue equals marginal cost, earning profits or losses. In the long run, entry and exit continues until price equals average total cost and profits are zero.

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Saad Salman
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42 views24 pages

Azhar

The document discusses monopolistic competition, including its assumptions, short run and long run equilibrium, and how it differs from perfect competition. Monopolistic competition has many small firms that produce differentiated but substitutable products, with free entry and exit in the long run. In the short run, firms set price along their demand curve where marginal revenue equals marginal cost, earning profits or losses. In the long run, entry and exit continues until price equals average total cost and profits are zero.

Uploaded by

Saad Salman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MONOPOLISTIC

COMPETITION
 Presented by:
Azhar abbas
(BBAF18E001)
 Presented to:
Sir Muhammad Waqas
Contents:
 Monopoly.
 Imperfect competition.
 Monopolistic competition.
 Assumptions of monopolistic competition.
 Long run vs short run.
 Short run equlibrium.
 Long run equlibrium.
Monopoly;

 Sole seller of a product.


 Many buyers.
 No close substitute.
 Example; (Cable T.V)
Types of Monopoly:

 Natural Monopoly:
The economies of scale arise from the natural
supply and demand conditions & not from the
govt. actions.
 Local monopoly :
A monopoly that exists in a
limited geographical area.
CONTINUE...
 Regulated monopoly:
A monopoly firm whose behavior is overseen
by the government entity.
 Monopoly power:
It is a market power, power to set the price.
 Monopolization:
An attempt by a firm to dominate a market or
become a monopoly.
Two extremes:

Perfect competition:
many firms, identical products
Monopoly: one firm
 Imperfect competition – in between the
extremes:
Oligopoly: only a few sellers offer similar or identical
products.
Monopolistic competition: many firms sell similar but
not identical products.
Imperfect competition

 The concept of imperfect competition was


first developed by Mrs. Joan Robinson in the
year “1933” ostensibly in her book “The
Economics of Imperfect Competition”.
 She showed that imperfect competition refers
to those market structures that fall between
perfect competition and pure monopoly.
According to this;

 Buyers and sellers have imperfect knowledge


of the market.
 Policy of product differentiation.
 Firms have free entry and exit.
Continued...
 Lateron, in the same year 1933 another
economist gave more wider concept of
monopolistic competition.
 Prof. Edward Hastingd Chamberlin in his
book “The Theory of Monopolistic
Competition”.
Forms of Market:
Monopolistic competition:
 Monopolistic competition is a market structure that’s a
little like monopoly and a little like perfect competition.
 It is a market situation in which a relatively large
number of producers offer similar but not identical
products.
 Monopolistic Competition refers to competition
among a large number of sellers of similar but
differentiated products, which are close substitutes
but not perfect substitutes of one another.
Examples(fast food shops, hairdressers ,clothings).
The Assumptions of monopoly
competition:
 The industry is made up of a fairly large numbers
of firms. The firms are small, relative to the size
of industry.
 Product examples include books, CDs,
movies, computer games, furniture, etc.
 However ,they have some control over prices.
 The firms assume that they are able to act
independently of each other.
Continued...
 Firms are completely free to enter or leave the
industry . There are no barriers to entry or exist.
 Product differentiation; Product of one
producer is differentiated with the product of
other producer, having close substitutes.
 Product differentiation plays a crucial role in
monopolistic competition.

.
Product differentiation:
 Product differentiation is the only way these
firms can acquire some market power.
 For example –Bathroom soaps:- Hamam,
Lux, Rexona, Cinthol, Lifebuoy, etc.
Short run v.s long run:
 Short run:
The short run is a period of time in which the
quantity of at least one input is fixed and the
quantities of others inputs can be varied.
 Long run:
The long run is a period of time in which the
quantities of all inputs can be varied.
Short Run Equilibrium:

 Profit maximization in the short-run for the


monopolistically competitive firm:
› Produce the quantity where MR = MC
› Price: on the demand curve
› If P > ATC: profit
› If P < ATC: loss
› Similar to monopoly
A Monopolistically Competitive Firm
Earning Profits in the Short Run
The firm faces a downward-sloping
D curve.
At each Q, MR < P.
To maximize profit, firm produces Q where MR = MC.
The firm uses the
D curve to set P.
 A Monopolistically Competitive Firm
With Losses in the Short Run

•For this firm,


P < ATC
at the output where MR = MC.
•The best this firm can do is to minimize its losses.
Continued...
 The graphical analysis of the monopolistically
competitive firm’s output, price, and profits/losses is
very similar to that of the monopoly firm.

 One subtle difference is that the demand curve (and


MR curve) facing the monopolistically competitive
firm is likely to be flatter than the demand curve
facing the monopolist, as the monopolistic
competitor faces competition from other firms
selling similar products.
Long Run Equilibrium:

 If
monopolistically competitive firms are
making profit in short run
o New firms: incentive to enter the market
o Increase number of products
o Reduces demand faced by each firm
o Demand curve shifts left; prices fall
o Each firm’s profit declines to zero
 If losses in the short run:
o Some firms exit the market, remaining firms enjoy
higher demand and prices
A Monopolistic Competitor in
the Long Run:
Entry and exit occurs until P = ATC and
profit = zero.
Notice that the firm charges a markup of price over marginal cost and
does not produce at minimum ATC.
How is monopoly competition different to
perfect competition:

 The major difference from perfect competition ,is


that in monopolistic competition ,there is product
differentiation.
 Products may differentiated by brand name,
colour, appearance ,packaging design and many
other methods.

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