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Monopolistic competition in the short run

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Monopolistic competition in the short run

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In this case of economic profit: The firm earns a positive profit because it can charge a price higher than its costs due to product differentiation and some market power.

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The firm earns normal profit (zero economic profit), which often happens when new firms enter the market, increasing competition and reducing individual firms' profits.

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6.2 Monopolistic competition in the long run

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6.2 Monopolistic competition in the long run

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In the long run, monopolistic competition leads to normal profit. Initially, supernormal profits attract new firms, increasing competition. This reduces demand for each firm, driving prices down. Eventually, all firms earn just enough to cover their costs, and no new firms enter or exit, achieving equilibrium.

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The firm is making losses in the short run because it cannot charge a price high enough to cover its costs.

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AR (Average Revenue): Shows the price customers are willing to pay for different quantities.

MR (Marginal Revenue): Shows the additional revenue from selling one more unit. It's below the AR curve.

MC (Marginal Cost): The cost of producing one more unit.

AC (Average Cost): The average cost per unit of production.

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-  Characterised by single seller, no substitute, and restricted entry to the industry.

-  Downward sloping DD curve: If the firm attempts to charge a higher price, it knows that there will be a fall in the quantity sold. On the other hand, if the firm seeks to increase quantity, it must lower its price.

-  Monopolist does not charge the highest price possible as it may not be able to sell sufficient unit of output and hence may not be able to cover even variable cost.

-  As long as MR > MC, the firm will continue to expand output and is not concerned with having to reduce price to increase the quantity sold

-  Monopolist is not guaranteed to make large profit

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Equilibrium condition: MR = MC; AR > AC

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Equilibrium condition: MR = MC; AR = AC

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Equilibrium condition: MR = MC; AR < AC

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A monopolist can make either an economic profit or a normal profit.

No firm can survive into the long run with an economic loss.

Barrier to entry which prevents competing firms from entering and taking a share in the market enables the monopolist to continue to maintain economic profit from the short run into the long run.

Whether the monopolist makes long-run economic profit or long-run normal profit depends upon demand and cost conditions.

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Apart from seeking profits, firms may pursue:

1. Sustaining livelihoods (common for small businesses).

2. Ensuring customer satisfaction.

3. Addressing stakeholder interests, such as those of shareholders and employees.

4. Promoting social welfare through mission-driven objectives.

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Monopolistic competition is a market structure with many firms offering differentiated products. Firms compete by making their products unique through features, branding, or quality. The more differentiated a product, the less sensitive customers are to price changes, giving firms some pricing power. However, since new firms can easily enter the market and offer competing products, a firm's control over its market share is always at risk. This creates a dynamic balance between competition and individual firm influence.

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It is a form of market structure that has small number of firms, that offers either standardised or differentiated products. Featuring high barriers to entry, to prevent new competitors entering the markets which will affect sales. Oligopoly firms are interdependent. One action made by one firm will changed others decision too.

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OP is the current price level

BAD is the demand curve

Looking at the graph, below OP, the demand curve is less elastic, which shows other firms may follow if price cut.

BA shows more elastic demand curve. This means other firms may not follow if price raise.

The Kink demand curve accounts for price stability. When an elastic curve is seen, this means firm is increasing cost, and this will cause firm to lose money as customers will move to other firms that willing to give lower price.

If firm lower it price to keep the standard across all markets, they will avoid facing losing customers. As such, firm will face less elastic demand curve below the kink.

So, by looking at the graph, the firm will not lower or increase the price, and the quantity and price will remain at the kink.

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Oligopolistic firms often work together due to their interdependence, ensuring stable market shares and higher profits when they collectively raise prices.

1. Cartels: Agreements among firms to regulate output, marketing, and pricing strategies (e.g., OPEC).

2. Price Leadership: Firms adjust their prices in line with changes made by the leading firm in the industry.