{"id":4183,"date":"2020-03-28T03:13:00","date_gmt":"2020-03-28T03:13:00","guid":{"rendered":"https:\/\/commerceiets.com\/?p=4183"},"modified":"2020-03-28T03:13:00","modified_gmt":"2020-03-28T03:13:00","slug":"monopolistic-competition","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/monopolistic-competition\/","title":{"rendered":"MONOPOLISTIC COMPETITION"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#MONOPOLISTIC_COMPETITION\" title=\"MONOPOLISTIC\nCOMPETITION\">MONOPOLISTIC\nCOMPETITION<\/a><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#The_concept_of_monopolistic_competition_was_put-forth_by_an_American_economist_Prof_EH_Chamberlin_in_his_popular_book_%E2%80%9CThe_Theory_of_Monopolistic_Competition%E2%80%9D_published_in_1933\" title=\"The concept of monopolistic competition was put-forth by an American economist Prof. E.H. Chamberlin in his popular book, \u201cThe Theory of Monopolistic Competition\u201d published in 1933.\">The concept of monopolistic competition was put-forth by an American economist Prof. E.H. Chamberlin in his popular book, \u201cThe Theory of Monopolistic Competition\u201d published in 1933.<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#FEATURES_OF_MONOPOLISTIC_COMPETITION\" title=\"FEATURES\nOF MONOPOLISTIC COMPETITION\">FEATURES\nOF MONOPOLISTIC COMPETITION<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#LARGE_NUMBER_OF_BUYERS_AND_SELLERS\" title=\"LARGE\nNUMBER OF BUYERS AND SELLERS\">LARGE\nNUMBER OF BUYERS AND SELLERS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#FREE_ENTRY_AND_EXIT_OF_FIRMS\" title=\"FREE ENTRY AND EXIT OF FIRMS\">FREE ENTRY AND EXIT OF FIRMS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#PRODUCT_DIFFERENTIATION\" title=\"PRODUCT DIFFERENTIATION\">PRODUCT DIFFERENTIATION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#LACK_OF_PERFECT_KNOWLEDGE\" title=\"LACK OF PERFECT KNOWLEDGE\">LACK OF PERFECT KNOWLEDGE<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#LESS_MOBILITY\" title=\"LESS MOBILITY\">LESS MOBILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#INDEPENDENT_PRICE_POLICY_AND_DOWNWARD_SLOPING_OF_AR-MR_CURVES\" title=\"INDEPENDENT PRICE POLICY AND\nDOWNWARD SLOPING OF AR-MR CURVES\">INDEPENDENT PRICE POLICY AND\nDOWNWARD SLOPING OF AR-MR CURVES<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#EQUILIBRIUM_PRICE_AND_OUTPUT_DETERMINATION_UNDER_MONOPOLISTIC_COMPETITION\" title=\"EQUILIBRIUM\/\nPRICE AND OUTPUT DETERMINATION UNDER MONOPOLISTIC COMPETITION\">EQUILIBRIUM\/\nPRICE AND OUTPUT DETERMINATION UNDER MONOPOLISTIC COMPETITION<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#SHORT_RUN_EQUILIBRIUM\" title=\"SHORT\nRUN EQUILIBRIUM\">SHORT\nRUN EQUILIBRIUM<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/commerceiets.com\/monopolistic-competition\/#LONG_RUN_EQUILIBRIUM\" title=\"LONG RUN EQUILIBRIUM\">LONG RUN EQUILIBRIUM<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"monopolistic-competition\"><span class=\"ez-toc-section\" id=\"MONOPOLISTIC_COMPETITION\"><\/span><strong>MONOPOLISTIC\nCOMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"the-concept-of-monopolistic-competition-was-put-forth-by-an-american-economist-prof-e-h-chamberlin-in-his-popular-book-the-theory-of-monopolistic-competition-published-in-1933\"><span class=\"ez-toc-section\" id=\"The_concept_of_monopolistic_competition_was_put-forth_by_an_American_economist_Prof_EH_Chamberlin_in_his_popular_book_%E2%80%9CThe_Theory_of_Monopolistic_Competition%E2%80%9D_published_in_1933\"><\/span>The concept of <strong>monopolistic competition<\/strong> was put-forth by an American economist Prof. E.H. Chamberlin in his popular book, \u201cThe Theory of Monopolistic Competition\u201d published in 1933.<span class=\"ez-toc-section-end\"><\/span><\/h5>\n\n\n\n<p>Monopolistic competition&nbsp;is a type of imperfect competition market structure\nin which a large number of firms produce differentiated products and there are\nno barriers to entry.<\/p>\n\n\n\n<p><strong>ACCORDING TO LIM CHONG YHA<\/strong><\/p>\n\n\n\n<p>\u201cMonopolistic competition is a market situation where\nthere are many producers but each offers a slightly differentiated product.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING TO JOE S BAIN<\/strong><\/p>\n\n\n\n<p>\u201cMonopolistic competition is found in the industry where\nthere are a large number of small sellers selling differentiated but close\nsubstitute products.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING TO LEFTWITCH<\/strong><\/p>\n\n\n\n<p>\u201cMonopolistic competition is a market situation in which\nthere are many sellers of a particular product, but the product of each seller\nis in some way differentiated in the minds of consumers from the product of\nevery other seller.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING TO PROF HH LEIBHAFSKY<\/strong><\/p>\n\n\n\n<p>\u2018<em>Monopolistic\ncompetition has today come&nbsp;to mean a state of affairs in which there is a\nlarge number of sellers selling non-homogenous or slightly\ndifferentiated&nbsp;products and in which freedom of entry exists.<\/em>\u2018<\/p>\n\n\n\n<p>Markets which exhibit\nmonopolistic competition include restaurants, hospitals, small retail outlets,\netc.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"features-of-monopolistic-competition\"><span class=\"ez-toc-section\" id=\"FEATURES_OF_MONOPOLISTIC_COMPETITION\"><\/span><strong>FEATURES\nOF MONOPOLISTIC COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\nmain features of monopolistic competition are as under:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"large-number-of-buyers-and-sellers\"><span class=\"ez-toc-section\" id=\"LARGE_NUMBER_OF_BUYERS_AND_SELLERS\"><\/span><strong>LARGE\nNUMBER OF BUYERS AND SELLERS<\/strong><strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>There are large number of firms but not as large as under <a href=\"https:\/\/commerceiets.com\/perfect-competition\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"perfect competition. (opens in a new tab)\">perfect competition.<\/a><\/p>\n\n\n\n<p>That means each firm can control its\nprice-output policy to some extent. It is assumed that any price-output policy\nof a firm will not get reaction from other firms that means each firm follows\nthe independent price policy.<\/p>\n\n\n\n<p>If a firm reduces its price, the gains in sales will be\nslightly spread over many of its rivals so that the extent to which each of the\nrival firms suffers will be very small. Thus these rival firms will have no\nreason to react.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"free-entry-and-exit-of-firms\"><span class=\"ez-toc-section\" id=\"FREE_ENTRY_AND_EXIT_OF_FIRMS\"><\/span><strong>FREE ENTRY AND EXIT OF FIRMS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Like perfect competition, under monopolistic competition\nalso, the firms can enter or exit freely. The firms will enter when the\nexisting firms are making super-normal profits. With the entry of new firms,\nthe supply would increase which would reduce the price and hence the existing\nfirms will be left only with normal profits. Similarly, if the existing firms\nare sustaining losses, some of the marginal firms will exit. It will reduce the\nsupply due to which price would rise and the existing firms will be left only\nwith normal profit.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"product-differentiation\"><span class=\"ez-toc-section\" id=\"PRODUCT_DIFFERENTIATION\"><\/span><strong>PRODUCT DIFFERENTIATION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Another feature of the monopolistic competition is the\nproduct differentiation. Product differentiation refers to a situation when the\nbuyers of the product differentiate the product with other. Basically, the\nproducts of different firms are not altogether different; they are slightly\ndifferent from others. Although each firm producing differentiated product has\nthe monopoly of its own product, yet he has to face the competition. This\nproduct differentiation may be real or imaginary. Real differences are like\ndesign, material used, skill etc. whereas imaginary differences are through\nadvertising, trade mark and so on.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"lack-of-perfect-knowledge\"><span class=\"ez-toc-section\" id=\"LACK_OF_PERFECT_KNOWLEDGE\"><\/span><strong>LACK OF PERFECT KNOWLEDGE<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The buyers and sellers do not have perfect knowledge of\nthe market. There are innumerable products each being a close substitute of the\nother. The buyers do not know about all these products, their qualities and\nprices.<\/p>\n\n\n\n<p>Therefore, so many buyers purchase a product out of a few\nvarieties which are offered for sale near the home. Sometimes a buyer knows\nabout a particular commodity where it is available at low price. But he is\nunable to go there due to lack of time or he is too lethargic to go or he is\nunable to find proper conveyance. Likewise, the seller does not know the exact\npreference of buyers and is, therefore, unable to get advantage out of the\nsituation.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"less-mobility\"><span class=\"ez-toc-section\" id=\"LESS_MOBILITY\"><\/span><strong>LESS MOBILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Under monopolistic competition both the factors of\nproduction as well as goods and services are not perfectly mobile.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"independent-price-policy-and-downward-sloping-of-ar-mr-curves\"><span class=\"ez-toc-section\" id=\"INDEPENDENT_PRICE_POLICY_AND_DOWNWARD_SLOPING_OF_AR-MR_CURVES\"><\/span><strong>INDEPENDENT PRICE POLICY AND\nDOWNWARD SLOPING OF AR-MR CURVES<\/strong><strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>A firm under monopolistic competition can have an\nindependent price policy. It is price maker for its product. Hence the AR and\nMR curves facing a firm under monopolistic competition will be downward sloping\nsimilar to the monopoly.<\/p>\n\n\n\n<p>But there is an important difference between the AR\ncurves under monopoly and monopolistic competition. The AR curve under\nmonopolistic competition is somewhat flatter than in the monopoly.<\/p>\n\n\n\n<p>AR\nand MR curves of a firm under monopolistic competition are illustrated in the\ndiagram:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"283\" height=\"220\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-101.png\" alt=\"\" class=\"wp-image-4185\"\/><figcaption><strong>MONOPOLISTIC COMPETITION<\/strong><\/figcaption><\/figure>\n\n\n\n<p>Under monopolistic competition, demand curve is more\nelastic. In order to sell more, the firms must reduce its price.<\/p>\n\n\n\n<p><strong>SOME CONTROL\nOVER PRICE<\/strong><\/p>\n\n\n\n<p>Since, the products are close substitutes for\neach other, if a firm lowers the price of its product, then the customers of\nother products will switch over to it. Conversely, with the increase in the\nprice of the product, it will lose its customers to others. Thus, under the\nmonopolistic competition, an individual firm is not a price taker but has some\ninfluence over the price of its product.<\/p>\n\n\n\n<p><strong>HEAVY\nEXPENDITURE ON ADVERTISEMENT AND OTHER SELLING COSTS<\/strong><\/p>\n\n\n\n<p>Under the monopolistic competition, the firms\nincur a huge cost on advertisements and other selling costs to promote the sale\nof their products. Since the products are different and are close substitutes\nfor each other; the firms need to undertake the promotional activities to\ncapture a larger market share.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"equilibrium-price-and-output-determination-under-monopolistic-competition\"><span class=\"ez-toc-section\" id=\"EQUILIBRIUM_PRICE_AND_OUTPUT_DETERMINATION_UNDER_MONOPOLISTIC_COMPETITION\"><\/span><strong>EQUILIBRIUM\/\nPRICE AND OUTPUT DETERMINATION UNDER MONOPOLISTIC COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A firm is said to be in equilibrium when it is incurring\nminimum costs and gaining maximum profits. Under monopolistic competition, the\nequilibrium is ascertained differently for industry and firm. <\/p>\n\n\n\n<p class=\"has-green-background-color has-background\"><strong>EQUILIBRIUM\/\nPRICE AND OUTPUT DETERMINATION FOR FIRM<\/strong><\/p>\n\n\n\n<p>For a\nfirm, the equilibrium may be determined in both long run and short run.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"short-run-equilibrium\"><span class=\"ez-toc-section\" id=\"SHORT_RUN_EQUILIBRIUM\"><\/span><strong>SHORT\nRUN EQUILIBRIUM<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Under monopolistic competition, the firm will be in\nequilibrium position when marginal revenue is equal to marginal cost.&nbsp;So\nlong the marginal revenue is greater than marginal cost, the seller will find\nit profitable to expand his output, and if the MR is less than MC, it is\nobvious he will reduce his output where the MR is equal to MC.&nbsp; <\/p>\n\n\n\n<p><strong>CONDITIONS:<\/strong> The two conditions to be satisfied for the firm to be in\nequilibrium are as follows:<\/p>\n\n\n\n<p>(1) MC = MR<\/p>\n\n\n\n<p>(2) MC must cut MR from below. <\/p>\n\n\n\n<p>Under monopolistic competition also, a firm will make the\nmaximum profits when these two conditions are satisfied.<\/p>\n\n\n\n<p>The firm may face any of three situations:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-102-1.png\" alt=\"\" class=\"wp-image-4186\"\/><figcaption><strong>MONOPOLISTIC COMPETITION<\/strong><\/figcaption><\/figure>\n\n\n\n<p><strong><em>SUPER NORMAL PROFIT<\/em><\/strong><\/p>\n\n\n\n<p>Under monopolistic competition, a firm earns maximum profits or is in equilibrium when MC=MR and MC cuts MR from below. In the diagram the firm is in equilibrium at OX level of output and at the point E, at which MR and MC are equal and MC cuts MR from below.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-103-1.png\" alt=\"\" class=\"wp-image-4187\"\/><\/figure>\n\n\n\n<p>The firm is earning super-normal profits or abnormal\nprofits since average revenue is greater than average cost, i.e., AR &gt; AC.\nThe main reason for these abnormal profits is that, the other rival firms are\nnot able to produce closely competitive substitutes. Hence, they are not able\nto attract consumers towards their product.<\/p>\n\n\n\n<p><strong><em>NORMAL PROFIT<\/em><\/strong><strong><em><\/em><\/strong><\/p>\n\n\n\n<p>If under monopolistic\ncompetition, the price of product is equal to AC, the firm will be earning\nnormal profit. In Figure MC is equal to MR at point E. This is the equilibrium\npoint. At equilibrium point, the equilibrium output is OX<sub>1<\/sub>&nbsp;and price is OP<sub>1<\/sub>. At this point,\nAC is NX<sub>1<\/sub>&nbsp;and AR is also NX<sub>1<\/sub>&nbsp;i.e.,\nAC=AR. Thus the firm will be earning only normal profits.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"213\" height=\"174\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-105.png\" alt=\"\" class=\"wp-image-4189\"\/><\/figure>\n\n\n\n<p><strong><em>SUSTAINING LOSSES<\/em><\/strong><strong><em><\/em><\/strong><\/p>\n\n\n\n<p>It is also possible that the demand may not be favourable\nto firm under monopolistic competition, i.e., it may not be able to attract the\nconsumers towards its product, if it fixes price equal to its SAC. But it is\ncompelled to sell its product at the price which is less than even its short\nperiod average cost.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"233\" height=\"176\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-106.png\" alt=\"\" class=\"wp-image-4190\"\/><\/figure>\n\n\n\n<p>Hence, it may incur losses such\nfirm, in the long-run may leave the industry, if it is not possible for it to\nchange its demand relative to its cost conditions through product\ndifferentiation and advertisement. In figure the firm is in equilibrium at\npoint E, where MC=MR. At this equilibrium level the output is OX<sub>1<\/sub>&nbsp;at price OP. Corresponding to this, the\naverage cost LX<sub>1<\/sub>&nbsp;is greater than average\nrevenue MX<sub>1<\/sub>, Since, revenue is less than cost, the firm will\nsustain losses equal to the shaded area PLMN.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"long-run-equilibrium\"><span class=\"ez-toc-section\" id=\"LONG_RUN_EQUILIBRIUM\"><\/span><strong>LONG RUN EQUILIBRIUM<\/strong><strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Long period refers to that time period in\nwhich each firm can change its production capacity by changing the fixed as\nwell as variable factors. New firms can enter the industry and old firms can\nexit it. Basically, the firms in the long run will get the normal profits.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"204\" height=\"209\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-107.png\" alt=\"\" class=\"wp-image-4191\"\/><\/figure>\n\n\n\n<p>If, the\nexisting firms are making super normal profits, it will attract some of the new\nfirms in the industry. The entry of new firms will result into over production\nwhich will have a depressing effect on price. Hence all the firms in the long\nrun will get normal profits. In figure output is measured on X-axis whereas\nprice on Y-axis. LAC is the long run average cost and LMC is the long fun\nmarginal cost curve. The firm is in equilibrium because at point E, MC = MR.\nThe equilibrium output is OX<sub>1<\/sub>&nbsp;and price\nis OP. Since, at this equilibrium average revenue curve is tangent to long run\naverage cost curve at point M; hence the firms are earning normal profits.<\/p>\n\n\n\n<p class=\"has-green-background-color has-background\"><strong>EQUILIBRIUM\/\nPRICE AND OUTPUT DETERMINATION FOR INDUSTRY<\/strong><\/p>\n\n\n\n<p>Under monopolistic competition, the word\n\u2018group\u2019 is used for industry. There is a difference between an industry and a\ngroup. An industry generally consists of firms which produce homogeneous\nproduct, whereas a group is composed of firms which produce a differentiated\nproduct. Thus group consists of a number of firms producing close substitutes.\nFor example, shoe making firms like \u2018Bata\u2019, \u2018Carona\u2019, and \u2018Liberty\u2019 are a\ngroup.<\/p>\n\n\n\n<p>Assumptions of equilibrium of industry:<\/p>\n\n\n\n<p>(i) Demand and cost curves of all the firms\nare identical,<\/p>\n\n\n\n<p>(ii) No firm can influence the price and\noutput decisions of its rivals.<\/p>\n\n\n\n<p>The Group Equilibrium is shown below with the help of following figure:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"199\" height=\"209\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-108.png\" alt=\"\" class=\"wp-image-4192\"\/><\/figure>\n\n\n\n<p>In the\ndiagram, DD<sub>1<\/sub>&nbsp;is the group demand curve and CC is the cost curve.\nEvery firm would like to fix up OP price because at this price the difference\nbetween price and cost is the maximum and producer gets supernormal profit\nequal to PMTB. The other firms will be attracted to enter the market and now\nthe market demand will be shared by a larger number of firms. In this situation\ndemand curve will shift downwards and the new demand curve will be DD<sub>2<\/sub>.<\/p>\n\n\n\n<p>The number of firms in the market will continue increasing till the new demand curve DD<sub>2<\/sub>\u00a0is tangent to the cost curve. In the Figure, at point \u2018K\u2019 demand curve is tangent to the cost curve. At this point firm will be earning only normal profit and this will be the equilibrium position of the firm. Thus under monopolistic competition, OB is the equilibrium price and ON is the equilibrium output.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/demand\/\">Theory of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-demand\/\">Law of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/demand-function\/\">Demand Function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/exceptions-of-law-of-demand\/\">Exceptions of law of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\">Elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/change-in-demand\/\">Change in demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/price-elasticity-of-demand\/\">Price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-law-of-demand-and-elasticity-of-demand\/\">Law of demand Vs Elasticity of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/factors-affecting-price-elasticity-of-demand\/\">Factors affecting price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/production-function\/\">Production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\">Short run vs long run production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-variable-proportions\/\">Law of variable proportions<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/types-of-demand\/\">Types of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/managerial-economics\/\">Managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/characteristics-of-managerial-economics\/\">Characteristics of managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-managerial-economics\/\">Scope of managerial economics<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/utility-analysis\/\">Utility analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\">Law of diminishing marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-equi-marginal-utility\/\">Law of equi marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium\/\">Consumers Equilibrium<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/indifference-curve-analysis\/\">Indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium-using-indifference-curve-analysis\/\">Consumer equilibrium using indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-tp-ap-and-mp\/\">Relationship between TP, AP and MP<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-increasing-returns\/\">Law of increasing returns<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-returns\/\">Law of diminishing returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-constant-returns\/\">Law of constant returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/returns-to-scale\/\">Returns to Scale<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/economies-and-diseconomies-of-scale\/\">Economies and diseconomies of scale<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\">Concept of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-ac-and-mc\/\">Relationship between AC and MC<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\">Traditional theory of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\">Modern theory of costs<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explicit-vs-implicit-costs\/\">Explicit vs Implicit costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/revenue\/\">Revenue<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\">Perfect competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-meaning\/\">Monopoly<\/a>&nbsp;<\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/price-discrimination\/\">Price discrimination<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-perfect-competition-and-monopoly\/\">Difference between perfect competition and monopoly<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-and-monopolistic-competition\/\">Perfect Vs Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-and-monopolistic-competition\/\">Monopoly and monopolistic competition<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/product-differentiation-strategy\/\">Product differentiation strategy<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\">Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/national-income-in-india\/\">National Income in India<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/measurement-of-national-income\/\">Measurement of national income in India<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/consumption-function\/\">Consumption function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\">Keynes Psychological law of consumption<\/a><\/td><td><\/td><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"266\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg\" alt=\"MONOPOLISTIC COMPETITION\" class=\"wp-image-787\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-300x78.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-768x199.jpg 768w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1536x398.jpg 1536w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize.jpg 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption>MONOPOLISTIC COMPETITION<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>MONOPOLISTIC COMPETITION The concept of monopolistic competition was put-forth by an American economist Prof. E.H. Chamberlin in his popular book, \u201cThe Theory of Monopolistic Competition\u201d published in 1933. Monopolistic competition&nbsp;is a type of imperfect competition market structure in which a large number of firms produce differentiated products and there are no barriers to entry. ACCORDING&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;MONOPOLISTIC COMPETITION&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":4193,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[113,92],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4183"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=4183"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4183\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/4193"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=4183"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=4183"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=4183"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}