Monopolistic Competition:

Idea between perfect and monopoly competition

 Enough number of sellers.

 Product differentiation (presentation, label and quality can be different but te product is

same).

 Advertisement cost (selling cost).

 Small price variation is possible because products are different

 Unrestricted entry.

 Monopolistic Competition

Concept of Proportional and perceived demand curve

At any specific price, the proportional demand curve gives the representative firm’s

share of the total market quantity demanded, on the assumption that all firm’s charge same price

Example:

Let the price of a firm’s product is Rs. 15/- and Qd of this product is 20 units. Firm

wants to increase the demand, so it decreases the price of that product to Rs. 12/- (with thinking

that demand will increase to 40 units). On the basis of firm’s thinking the demand curve is

formed. It is called “Perceived demand curve”.

But in reality, due to response of other firms the demand does not increase as the

firm’s thinking. It only increases to 25 units. This real demand curve is called “proportional

demand curve”

Equilibrium condition:

 1st condition: MR = MC

 2nd condition: slope of MC > slope of MR

 3rd condition: Proportional demand curve and perceived demand curve should interest

each other

Equilibrium in short-run:

In short-run, there are four cases of equilibrium of a firm under the monopolistic

i- P > ATC (super-normal profit)

ii- P = ATC (normal profit)

iii- AVC < P < ATC (loss or partial loss of TFC)

iv- P = AVC ( loss of TFC)

Monopolistic Competition

Reasons of normal profit in long-run:

 Price war among existing firms

 Entry of new firms

So, in monopolistic competition firm always earn the normal profit