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Understanding Monopolistic Competition

Monopolistic competition is a market structure between monopoly and perfect competition. Firms have many competitors but each sells a slightly differentiated product. There is freedom of entry and exit into the market. In the short run, firms can set prices elastically and earn economic profits, but in the long run normal profits are achieved as new firms enter. Examples include restaurants, hairdressers, clothing brands, and TV channels.

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Mishika Adwani
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167 views12 pages

Understanding Monopolistic Competition

Monopolistic competition is a market structure between monopoly and perfect competition. Firms have many competitors but each sells a slightly differentiated product. There is freedom of entry and exit into the market. In the short run, firms can set prices elastically and earn economic profits, but in the long run normal profits are achieved as new firms enter. Examples include restaurants, hairdressers, clothing brands, and TV channels.

Uploaded by

Mishika Adwani
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
  • Monopolistic Competition
  • Understanding Monopolistic Competition
  • Examples
  • Features of Monopolistic Competition
  • Monopolistic Competition in Short Run
  • Monopolistic Competition in Long Run
  • Efficiency in Monopolistic Competition
  • Comparison with Other Competition Forms
  • Conclusion

Monopolistic

Competition
-Mishika Adwani
What is Monopolistic Competition?
❖ The monopolistic competition is actually a structure between
monopoly and perfect competition.
❖ A Monopolistic competition is a market structure in which
firms(business organizations) have many competitors but each one
of them sells a slightly different product.
❖ Unlike monopoly, the monopolistic competition has competition
and unlike perfect competition, the competition is between
products that slightly differ.
❖ A monopolistic competitive market is the one with freedom of entry and
exit, but the firms can differentiate their products.
❖ There is an inelastic demand curve(Inelastic demand is when people buy
about the same amount of a product or service whether the price drops or
rises.). The prices, hence can be changed by the firm.
❖ The firms, as they have the freedom to enter and exit hence can maintain
normal profits in the long term.
Examples

Restaurants Hairdresser Clothing TV programmes


They compete The basis of The basis of There are a lot
on quality and competition is competition is of channels
price. Difference the difference in the difference in which the
in the product is quality of branding and consumer can
the key factor of services. material of choose.
competition. clothes.
Features of
Monopolistic
competition
01. 02.
There are a good number of firms in a There is freedom of entry
Monopolistic competition. and exit.

03. 04.
Firms produce differentiated products. Firms have price inelastic demand
05. 06.
Due to inelastic demand, the firms can Firms make normal profit in the long run
change the prices. and supernormal profit in short run.

07.
Firms are allocatively and productively
inefficient.
Monopolistic competition in
short run
In a short run the firms produce such
products where marginal revenue = marginal
costs to earn economic profit.
In this graph, the MR=MC
Here D is the market demand and AC is
average cost. And here the average cost is less
than the marginal cost to earn economic
profit.
This is at output Q1 and price P1, leading to
supernormal profit.
Monopolistic competition in
long run

If the competitive firms in an industry earn


an economic profit, then other firms will
enter the same industry, which will reduce
the profits of the other firms. More firms will
continue to enter the industry until the firms
are earning only a normal profit.

There is also equilibrium of normal profit in


long run monopolistic competition.
Efficiency of firms in monopolistic competition

1. 2. 3. 4.

Allocative Productive Dynamic X-efficiency OR


inefficiency inefficiency efficiency Competitive
efficiency
Difference with Monopoly and Perfect competition

Difference with Difference with perfect


monopoly competition

In monopolistic competition In Monopolistic competition,


there are no barriers to entry. firms produce differentiated
Therefore in the long run, products, therefore, they
the market will be have inelastic demand.
competitive, with firms
making normal profit.
Thank you !

-Mishika Adwani Monopolistic Competition
What is Monopolistic Competition? ❖ The monopolistic competition is actually (http://www.pptmon.com/) a structure between mo
❖ A monopolistic competitive market is the one with freedom of entry (http://www.pptmon.com/) and exit, but the firms can di
Examples They (http://www.pptmon.com/) compete on quality and price. Difference in the product is the key factor of comp
Features of Monopolistic competition
There is freedom of entry (http://www.pptmon.com/) and exit. 02. Firms produce differentiated products. 03. Firms have price
06. 05. Due to inelastic demand, the firms can change the prices. Firms make normal profit in the long run and supernormal
Monopolistic competition in short run In a short run the firms produce such products where marginal revenue = marginal cos
Monopolistic competition in long run If the competitive firms in an industry (http://www.pptmon.com/) earn an economic prof
Efficiency (http://www.pptmon.com/) of firms in monopolistic competition Allocative inefficiency 1. Productive inefficiency

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