# Price determination under monopolistic competition with diagram. Price Determination under Monopolistic Competition 2022-10-26

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Monopolistic competition is a market structure in which there are many firms selling products that are similar but not identical. In this type of market, firms have some degree of market power, meaning they can influence the price of their product to some extent. However, because there are many firms in the market and the products are not perfect substitutes for one another, firms face competition from other firms and cannot charge a price that is too high relative to the prices of their competitors.

One way to understand how firms in monopolistic competition determine their prices is through the use of a diagram. In the diagram below, the horizontal axis represents the quantity of the product being sold and the vertical axis represents the price of the product. The demand curve for the firm's product is downward-sloping, indicating that as the price of the product increases, the quantity demanded decreases. The average total cost curve represents the cost of producing the product, and the marginal cost curve represents the additional cost of producing one more unit of the product.

[Diagram]

In the diagram, the profit-maximizing quantity of the product is at the intersection of the demand curve and the marginal cost curve. At this quantity, the firm is able to charge a price that is above the average total cost of production, resulting in positive profit. However, because the firm is in a monopolistically competitive market, it must also consider the prices of its competitors when setting its own price. If the firm were to set its price too high relative to the prices of its competitors, it would lose market share and potentially face a downward-sloping demand curve.

To find the profit-maximizing price in a monopolistically competitive market, the firm must balance the desire to maximize profit with the need to remain competitive in the market. This is achieved by setting a price that is slightly above the marginal cost of production but not so high that it drives away customers to the firm's competitors. In the diagram, this is represented by the intersection of the demand curve and the marginal cost curve at a price slightly above the average total cost curve.

In summary, in a monopolistically competitive market, firms have some market power but are still subject to competition from other firms. The profit-maximizing price for a firm in this type of market is achieved by balancing the desire to maximize profit with the need to remain competitive in the market. This is achieved by setting a price that is slightly above the marginal cost of production but not so high that it drives away customers to the firm's competitors.

## How to Determine Price & Output under Monopolistic Competition?

He may start two shifts of production, hire more labour, raw materials, etc. On the other hand, the market is split up into segments in each of which the differentiated product rules supreme. Price under Oligopoly: In an oligopoly, the number of sellers is small as against a sole seller under monopoly and many sellers under monopolistic completion. See figure 1 vi In the long run, the firm is earning normal profit. Thus OQ production is determined and OP is the price.

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## Explain price and output determined under monopolistic competition with help of diagram?

But he cannot fix both the price and also force the people to buy a pre-determined quantity at that price. However, product differentiation is an important feature of monopolistic competition. There is a counter-campaign by the rivals. The total revenue is the maximum when MR is zero. Price is OP and output is OQ. Under this, the number of producers and sellers is large and most of them work at small scale.

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## Price Determination under Discriminating Monopoly (With Diagram)

Meaning of Monopolistic Competition Competition is also found among different producers and sellers due to product homogeneity. Price as usual is determined at the point where the SMC curve cuts the MR curve from below. The priced terminating monopolist has to decide: ADVERTISEMENTS: a The total output that he must produce. Geometrically speaking, the point of monopoly equilibrium is one where the MC curve cuts the MR curve from below or from left, and a perpendicular from it to the AR curve determines price. Product differentiation refers to that situation wherein buyer can distinguish one product from another. The demand curve is thus indeterminate. Figure 18 B shows a short-run situation in which the monopolist earns only normal profits.

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## PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION DEFINITIONS According to

Total profit of good B is SGHP which is more than good A whose profit is RFEP. AC is the average cost curve and MC is the marginal cost curve. It is at the equilibrium point that profits are maximized or losses are minimized. Thus, the price under monopolistic competition is determined at the point at which marginal cost and marginal revenue of a firm are equal. Under competitive capitalism, there is no central authority directing the economic forces.

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## Price and Output Determination under Monopoly (with graph)

But under differing revenue and cost conditions, the monopolistically competitive firms many incur loss. Since the product has been manufactured in the past, costs are of no relevance to him. This condition-is essential to eliminate competition; ADVERTISEMENTS: b The commodity dealt in should have no closely competing substitutes. Price performs a very important function in the economic system. Like the competitive equilibrium, this analysis can also be discussed in terms of the total revenue-total cost approach and the marginal revenue-cost approach.

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## Price Determination under Monopolistic Competition

It can be seen from Fig. In the long run if firms are earning profit new firms are attracted and it will increase the output and consequently prices will fall leading to conversion of profit making situation into normal profit situation. If stocks have been accumulated, the price will fall making demand to come up to the level of the supply. Price is PQ and output is OQ. This happens particularly when the good in question is a direct service. Actually, there is monopolistic competition which is one of the various forms that imperfect competition takes. On the OQ quantity of production, total profit is PTSR shaded area which is abnormal profit.

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## Price Determination under Imperfect Competition (Explain with Diagram)

How is Price Determined under Oligopoly: Since price-output decisions by one firm affect the decisions of other firms, nobody can be sure of their reaction. We discuss the determination of monopoly price in the market period, the short period, and the long period. It means in the beginning proportionate increase in sales is more than the increase in selling costs. The monopolist is a rational being who aims at maximum gain with the minimum of costs. But size of each firm is small. By doing so, it can increase selling price and gradually it will increase to the point of equilibrium. The price-output equilibrium of the monopolist can be easily understood with the help of Fig.

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## Monopolistic Competition: Meaning, Features, Price determination

And each firm determines its own price-output policy without considering the reactions of rival firms. Before incurring selling costs , suppose that price is as shown by AR 1 curve and average cost of production is as shown by ACP. The firm may also incur losses in the short run if it is facing AR curve below the AC curve. The situation in the real world lies between these two extremes. The commodity will then be put only to more urgent uses. In the short run, therefore, the firm will be in equilibrium when it is maximising its profits, i. We may now briefly refer to the role that price mechanism plays in the economic system.

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## Determination of Value or Price under Monopoly (With Diagram)

. Price of the product is determined by the industry and each firm has got to accept that price. Thus, monopolistic competition is a combination of both perfect competition and monopoly. On the other hand, a firm under monopolistic competition can determine either the output to be produced or the price to be charged. But the monopoly price MP, as fixed by demand conditions, does not cover the short-run average costs of production MA.

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## Price Determination under Monopoly

But there is this difference that the-supply is not free to adjust itself to demand. On the other hand, the monopolist can influence the price. Price Determination under Monopolistic Competition: Under monopolistic competition, the firm will be in equilibrium position when marginal revenue is equal to marginal cost. ADVERTISEMENTS: But this price does not bring in maximum total revenue as MR is negative. So, average revenue and marginal revenue, at every level of production, will be constant and equal. In any case, his price cannot be below the average variable costs. Thus single firm constitutes the industry.

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