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Tamil Nadu Board of Secondary EducationHSC Commerce Class 11

Explain price and output determined under monopolistic competition with help of diagram. - Economics

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Question

Explain price and output determined under monopolistic competition with help of the diagram.

Long Answer

Solution

Monopolistic competition refers to a market situation where there are many firms selling differentiated products.

Price and output determination:
Nature of cost and revenue curves:
The monopolistic firm sells large quantities at less price. So, it faces a downward-sloping demand curve. AR curve is fairly elastic. MR curve falls below AR. AC curve will be ‘U’ shaped.

Condition for equilibrium:
MC = MR, MC curve should cut MR from below. If MC is less than MR, the sellers will find it profitable to expand their output.

  • Short-run equilibrium:

Profit is maximised when MC = MR. From the diagram.
OM – Equilibrium output OP – Equilibrium price
TR – OMQP TC – OMRS
Profit = OMQP-OMRS
= PQRS
This is super normal profit in the short run.
A monopolistic competitive firm may also incur a loss in the short run.

As shown in the diagram, the AR and MR curves are fairly elastic.
At equilibrium output is OM, price is OP
TR – OMQP
TC-OMLK
Total loss = TR-TC
= OMQP – OMLK
= PQLK

  • Long-run equilibrium:
    In the long run, the AR curve is more elastic or flatter. Hence, the firms will only earn a normal profit.

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Forms of Market Structure - Monopolistic Competition
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Chapter 5: Market Structure and Pricing - Model Questions - Part D [Page 119]

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Samacheer Kalvi Economics [English] Class 11 TN Board
Chapter 5 Market Structure and Pricing
Model Questions - Part D | Q 40 | Page 119
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