Monopolistic Competition is one of three market structures in the Economy. The other two that is Perfect Competition and Monopoly has a few similarities with Monopolistic Competition.
There are a few features of monopolistic competition. Firstly, it has many sellers in the industry which is why they produce few market supplies which means that sellers couldn’t control the price.
Secondly, firm produces differentiated products to keep it distinct. This causes an increase in competition, hence influencing over pricing.
Thirdly, firm is free to enter and exit the industry. This leads to
inhabit competition and maintain normal profits in the long run.
Fourthly, the firm is independent, due to many differentiated firms. which
avoids firms from being influenced by one another.
Lastly, in the Monopolistic market structure the firm
is facing a downward sloping demand curve, which means nobody could sell lower
than the market price.
As figure above has shown the monopolistic competition facing downward sloping demand curve. In the market, many sellers are selling close substitutes products. Therefore, the demand curve in monopolistic competition is fairly elastic.
For more information on Monopolistic Competition,
This video may be of help
In this market structure firm earns 3 types of profit in short run:
1. Normal profit happens when total revenue (TR) = total cost (TC) and average revenue (AR) = average cost (AC).
Figure 1.1
Figure 1.1
Figure 1.1 shows normal profit graph.
2. Supernormal profit happens when TR > TC and AR >AC.
Figure 1.2
Figure 1.2 shows supernormal profit graph.
3. Sub-normal profit happens when TR < TC and AR < AC.
Figure 1.3
Figure 1.3 has shown subnormal profit graph.
As figure above has shown the monopolistic competition facing downward sloping demand curve. In the market, many sellers are selling close substitutes products. Therefore, the demand curve in monopolistic competition is fairly elastic.
For more information on Monopolistic Competition,
This video may be of help
In this market structure firm earns 3 types of profit in short run:
1. Normal profit happens when total revenue (TR) = total cost (TC) and average revenue (AR) = average cost (AC).
Figure 1.1
Figure 1.1
Figure 1.1 shows normal profit graph.
2. Supernormal profit happens when TR > TC and AR >AC.
Figure 1.2
Figure 1.2 shows supernormal profit graph.
3. Sub-normal profit happens when TR < TC and AR < AC.
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