Business economics in Theory of Monopolistic Competition

Monopolistic competition is a type of competition which is apparently similar to a perfect competition but isn't so in reality. In this type of competition, it is found that there are multiple sellers offering varied products to buyers. The term monopolistic competition was given by Professor Edward H. Chamberlin of Harvard university in the year 1933 in his book, Theory of Monopolistic competition. This is the most truthful situation that exists in a market. For example, there are variety of watches offered by different organizations, such as Titan, Sonata, Rolex, Rado and Tommy Hilfiger but the main difference here is that the product sold by each of these are not a perfect substitute of each other and differs from each other in some or the other way .

Important characteristics of this market are as mentioned below:There is a presence of large number of sellers and buyers: This is the primary characteristic of this type of competition that there are many buyers and sellers that offer different products to an equal number of buyers.

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There is a difference in products: There is a difference in products sold in such kind of a competition, the products generally differ in style, quality standards, trademarks, brands etc. Despite this difference the products continue to be a close substitute of each other.It is easy to enter and exit: Since in this kind of competition, there are limited number of restrictions put by the government hence it is easy for organizations to enter and exit the market.

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The Price control: Under this kind of competition, the sellers do not have much control over the pricing of products and the price policy of competitors influences the price policy of an organization The equilibrium in monopolistic competition is different from a long run equilibrium under perfect competition because of the below mentioned reasons:The first major difference between these two is that while under perfect competition price is equal to marginal cost at the equilibrium output, we see that in monopoly equilibrium price is greater than marginal cost. To understand the cause, we would need to observe that Under perfect competition average revenue curve is a horizontal straight line and therefore marginal revenue curve and average revenue curve coincide with each other and as a result marginal revenue and average revenue are equal across all output levels hence at the equilibrium output marginal cost equals marginal revenue and equals average revenue. On the other hand, average revenue curve opposing a monopolistic firm goes downward and marginal revenue curve therefore lies below it. Under monopoly, average price is greater than marginal price at all output levels. Hence, at the equilibrium output of the monopolistic competition where marginal cost equals marginal revenue, price stands higher than marginal cost. Thus, under perfectly competitive equilibrium, price = MR = MC. In monopoly equilibrium, price > MC.Under perfect competition, equilibrium is possible in situation only when marginal cost is rising at the point of equilibrium, but monopoly equilibrium can be reached whether marginal cost is rising, remaining constant or falling at the equilibrium output.Under perfect competition an industry generally has a higher number of firms. Each firm in the industry has comparatively less share in the total output. The firms are hence bound to accept the price determined by the industry. On the other hand, under monopolistic competition the number of firms is limited, and the firms can impact the market price by their actions.Under perfect competition, price is observed to be equal to marginal cost as well as marginal revenue whereas under monopolistic competition marginal cost and marginal revenue are equal yet not equalizing the price of product.As observed Under monopolistic competition firms get extraordinary profits only in the short period however in the long run the existence of such profits disappears. It is so because in the long term, price becomes equal to average cost of production. In case of perfect competition, the situation is little different.An important difference between the monopolistic and perfect competition is in regard to the selling costs. Under perfect competition, similar goods are produced and are sold at even prices hence there is no compulsion of selling costs. On the other side under monopolistic competition, all the firms produce different products, so each firm must bear the huge expenses on selling cost.Quantity Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average total Cost Marginal Cost 0 100 0 100 0 0 0 01 100 25 125 100 25 125 252 100 40 140 50 20 70 153 100 50 150 33.33 16.67 50 104 100 60 160 25 15 40 105 100 80 180 20 16 36 206 100 110 210 16.67 18.33 35 307 100 150 250 14.29 21.49 35.71 408 100 300 400 12.5 37.5 50 1509 100 500 600 11.11 55.56 66.67 20010 100 900 1000 10 90 100 400Total Fixed Cost: - This is the Cost of production that doesn't change with changes in the quantity of output produced by a firm in short span of time. Total fixed cost is the cost sustained in the short-run production that doesn't depend on the quantity of output.Total Variable Cost: - This type of cost directly depends on output level of the firm. It varies with the changes in volume or level of output however the change may not be necessarily in the same proportion. The total of fixed costs and variable costs of a firm would constitute its total production cost. Total Cost " This cost signifies the actual cost that is borne by an organization to produce a specific level of output. This is derived from two basic elements. A) Total Fixed cost and B) Total Variable CostAverage fixed cost - Average fixed cost is the fixed cost divided by the quantity of output. Fixed costs are the ones that must be incurred in fixed quantity regardless of the output level produced. Average fixed cost is fixed cost per unit of output. average fixed cost remains positive and can never be zero.Average Variable cost " This is the cost that signifies the variable expenses per unit of output. It is derived by dividing the total variable cost by the total output. For instance, the total variable cost for producing 1000 meters of cloth is INR 8000, the average variable cost will be INR 80 per meter.Average Total Cost " When we divide the total cost by the number of output quantity, it is called as average total cost. It is also known as per unit total cost. It consists of all fixed and variable costs. In other words, the sum of all production cost divided by number of goods produced.Marginal Cost - Marginal Cost is an increase in total cost that would have resulted from a unit increase in output. It is defined as:-"The cost that results from a unit change in the production rate".Marginal Cost = Change in Total Cost = ”TC Change in Output ”QThe long run marginal cost curve similar to the long run average cost curve is U-shaped. As production increases, the marginal cost falls sharply in the beginning, reaches a minimum and then rises sharply.A. The concept of price elasticity in demand plays an important role in economy by contributing in the field of industry trade and commerce. It also helps organizations in analyzing economic problems and accordingly making the business decisions. Practical uses of concept of price elasticity of demand can be understood better basis below pointers.In determining the price: - Organizations use the concept of price elasticity in demand to determine prices in different situations. For example, under monopolistic market, the organizations set lower price for units of production in case of elastic demand, this helps in increasing the demand of product. Similarly, if the demand of a product becomes inelastic, organizations set a high price per unit of product. This way the organizations can earn high revenues because of the high price of the product with the demands being constant.Discrimination in prices: - Price elasticity of demand plays a very important role in this area. Price discrimination means charging different prices to different customers for the same product, It is majorly observed with products that have inelastic demand, for example " the demand of petrol is inelastic and change of price doesn't affect the consumption of petrol hence the price of petrol is different in different states of india.In forming the tax policies: - While deciding the taxation policies, Government take the price elasticity in demand into consideration. It is commonly observed that government charges high taxes on product (for producers) whose demand is elastic whereas for customers high taxes are levied on products that have inelastic demand since the consumption remains the same.International business: - The concept of price elasticity plays a vital role in international business. Here the price elasticity of demand is used in deciding the import and export of products.Making agricultural policies: - The price elasticity of demand helps the government while forming the agricultural policies. It is observed that generally the price of products of inelastic demands fall in case of high production. This fall in prices, results in low income of farmers and hence the increase in poverty. To avoid this, government sets a minimum suitable price for inelastic farm products. 3.B. Demand refers to the quantity of product or services that a consumer is ready to buy. Demand curve is a graph that signifies the quantity demanded by consumer at different prices. The movement in demand curve happens due to change in price of a product or service while the shift in curve happens because of factors other than price. Movement is basically the change along the curve while shift is a change in position of the curve. Factors that would brig a shift in demand curve for Maggie noodles are as follows. I. Taste " When the product is introduced, the demand curves shift to right however the shift could turn to left if product with similar taste is introduced in market. With new products of similar tastes being introduced by other companies for example " Sun Feast noodles, Patanjali noodles extra, there could be a shift in demand curve.II. Health awareness and fitness approach " Talking of Maggie noodles, it is a product that is considered as a junk food hence the level of heath awareness and people being cautious of fitness can bring a shift in demand curve.III. Urbanization " Maggie as a food is more commonly used in urban parts of the country, the increase in urbanization can bring a shift to the demand curve.IV. Composition of population " The facts like major age group of population also impacts the shift in demand curve for product like Maggie noodles as it is majorly consumed by the younger age group.v. Income " The income of users is an important factor that impacts the demand cure, for the normal items, demand increases as the income grows and Maggie noodles being a food item, can be considered as an item of normal usage.

Updated: Feb 22, 2021
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Business economics in Theory of Monopolistic Competition. (2019, Aug 20). Retrieved from

Business economics in Theory of Monopolistic Competition essay
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