The document discusses monopolistic competition, including its key characteristics and how firms determine profit-maximizing price and output levels. Under monopolistic competition, there are many small firms that sell differentiated but substitutable products. Firms have some control over prices and follow independent pricing. Entry and exit from the market is relatively easy in the long run. The document examines how firms analyze total revenue, marginal revenue, and costs to determine the quantity that maximizes profits in the short run. In the long run, entry and exit of firms leads to normal profits under monopolistic competition.

1. Microeconomics All Rights Reserved
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11– 1

2. CHAPTER
11 Monopolistic
Competition
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3. DEFINITION OF MONOPOLISTIC
COMPETITION
Definition
It is a market structure in which there are large
numbers of small sellers selling differentiated
products. These Product are close substitute
and firms have easy entry and exit from the
market.
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4. CHARACTERISTICS OF
MONOPOLISTIC COMPETITION
Characteristics
• Large number of buyers and sellers: Each
firm produces different or unique products, so
they have some control over the prices and
follows an independent price-output policy.
• Differentiated products: Product
differentiation could be through packaging,
design, labelling, advertising and brand name.
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5. CHARACTERISTICS OF
MONOPOLISTIC COMPETITION (CON’T)
• Free of entry and exit into the market: Not
as easy as perfect competition because of the
existence of product differentiation.
• Role of non-price competition is
significant: Various methods used to attract
the customers to buy a particular brand.
• Selling cost: Different types of expenditure
on advertisement would incur additional cost.
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6. TOTAL REVENUE –
TOTAL COST APPROACH
(1) (2) (3) (4) 5) Using Table:
Total
Quantity Price Total Cost Profit Profit maximization is
(Q) (P) Revenue (TC) (TR-TC)
(TR) determined by
scanning through the
0 340 0 200 -200 profit at each level,
1 340 340 400 -60 and the level which
2 330 660 560 100 gives the highest profit
3 320 960 700 260 is the profit maximizing
output.
4 310 1240 800 440
5 300 1500 900 600
6 290 1740 1040 700
7 280 1960 1200 760
8 270 2160 1400 760
9 260 2340 1800 540
10 240 2400 2400 0
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7. TOTAL REVENUE –
TOTAL COST APPROACH (CON’T)
TR, TC
Using Graph:
TC TR curve is increasing
TR and after the profit
maximizing output, the
curve starts to decline.
Maximum profit is
Highest vertical where the vertical
difference difference
between TR and TC is
the highest.
Quantity
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8. MARGINAL REVENUE –
MARGINAL COST APPROACH
Quantity Price Marginal Marginal
(Q) (P) Revenue Cost
(MR) (MC)
0 340 Using Table:
1 340 340 200 The profit maximizing
2 160
output level is obtained
330 320
following the
3 320 300 140 MR = MC rule.
4 310 280 100
5 300 260 100
6 290 240 140
7 280 220 160
8 270 200 200
9 260 180 400
10 240 60 600
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9. MARGINAL REVENUE – MARGINAL
COST APPROACH (CON’T)
MR, MC
MC
Using Graph:
MR curve under imperfect market
is downward sloping as the
P* output increases.
The profit maximization level
occurs, MR = MC, where
AR=P the MC curve intersect with the
MR curve.
MR
Quantity
Q*
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10. PROFIT MAXIMIZATION USING
THE EQUATION METHOD
The demand function for a monopolistic
competitive firm is given as P= 2000 –
1.5Q and MC is constant at RM800 per unit.
Calculate profit maximizing price and
quantity.
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11. PROFIT MAXIMIZATION USING
THE EQUATION METHOD (CON’T)
Solution
For profit maximization to take place,
we use the MR = MC rule.
Firstly, we need to derive the demand curve.
Given P = 2000 − 1.5Q
MR = 2000 − 3Q
MR = MC
2000 − 3Q = 800
3Q = 1200
Q = 400
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12. PROFIT MAXIMIZATION USING
THE EQUATION METHOD (CON’T)
• Substitute Q = 400 into P = 2000 − 1.5Q
P = 2000 − 600
P = 1400
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13. PROFIT MAXIMIZATION IN THE
SHORT RUN
Monopolistic competitive firm economic profit
The profit maximization level occurs
Price (RM) MC where MR curve and MC curve
intersect at point A.
ATC
To find the price, we use the same
vertical line with output up to the
demand curve. The profit maximizing
P*
AC PROFIT price and output are P* and Q*.
A At output Q, the firm earns economic
DD = AR
profit or supernormal profit equal to
the area Shaded.
MR
Economic profit or supernormal profit
Quantity is the profit earned by a monopolist
Q* when TR>TC.
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14. PROFIT MAXIMIZATION IN THE
SHORT RUN (CON’T)
Monopolistic competitive firm at breakeven
Price (RM) MC
ATC The profit maximization level occurs
where MR curve and MC curve
intersect at point A.
AC/P* The profit maximizing price and
output are P* and Q*.
A
DD = AR
At output, Q monopolist is at the
breakeven or earns normal profit.
MR
Economic profit or supernormal
profit is the profit earned by a
Q* Quantity monopolist when TR>TC.
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15. PROFIT MAXIMIZATION IN THE
SHORT RUN (CON’T)
Monopoly competitive firm suffers economic losses
Price (RM) MC ATC The profit maximization level
occurs where MR curve and
MC curve intersect at point A.
AC The profit maximizing price and
LOSSES output are P* and Q*.
P*
At output, Q monopolist suffers
A
economic losses or subnormal
DD = AR
profit equal to the area shaded.
MR Economic losses or subnormal
profit is the loss incurred by a
Quantity
Q* monopolist when TR<TC.
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16. PROFIT MAXIMIZATION IN
THE LONG RUN
Monopoly competitive firm earns normal profit in long run
Price (RM) LRMC
LRATC
A monopolistic competitive
firm earns normal profit in
the long run due free entry
and exit.
P*
A
DD = LRAR
LRMR
Quantity
Q*
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