I HAVE DONE THIS ASSIGNMENT FOR FULFILLMENT COURSE ON MANAGERIAL ECONOMICS.

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Monopolistic Competition
In the real world, market is neither perfectly competitive nor a monopoly. The great majority of
imperfectly competitive producers in the real world produce goods, which are neither completely
different nor completely same. They produce goods, which are analogous to those produced by their
rivals. This means that the goods produced in the market are close substitutes. It follows that such
producers must be concerned about the way in which the action of these rivals affects their own
profits. This kind of market is known as „monopolistic competition‟ or group equilibrium. Here there
is competition, which is keen, though not perfect, between firms manufacturing very similar
products, for example market for toothpaste, cosmetics, watches, etc.
FEATURES OF MONOPOLISTIC COMPETITION
Following are the features of a monopolistic competitive market:
Large number of firm: Monopolistic competition is characterized by large number of firms
producing close substitutes but not identical product. Each firm must control a small yet significant
portion of the market share such that by substantially extending or restricting its own sales, it is not
able to affect the sales of any other individual seller. This condition is the same as in perfect market.
There is product differentiation: No seller has full control over the market supply. Each seller
produces very close substitute products. The product is neither identical normarkedly different. Since
every seller produces slightly differentiated product, each seller has minor control over the price.
Unlike perfect market conditions, the firm is a price – maker to some extent. That is, a firm can
change the price slightly, though not much. The control over price will depend on the degree of
product differentiation.
Absence of Inter-dependence:Existence of a large number of firms insures the condition too large
and too small. Thus, the individual firm‟s supply is small constituent of total supply. Therefore,
individual firm has limited control over price level. Similarly, each firm can decide, its price or
output policies independently through price discrimination, any action by one firm may not invite
reaction from rival firms.
Selling cost:Competitive advertisement is an essential feature of monopolistic competition. Selling
cost becomes an integral part of the marketing of firms when product is differentiated. It is necessary
to tell the buyers about the superiority of the product and induce the customer to buy the products
Free entry and exit:Under monopolistic competition, new firm firms can exit. There are no
restrictions on entry or exit of the small size of firms. Existence of supernormal profit attracts entry
loss, business firms to quit the market.
Lack of perfect knowledge: the buyers and sellers do not have perfect knowledge of the market
there are innumerable product each being a close substitute of the other. The buyers do not know
about these entire product their qualities and prices.
Less mobility; under monopolistic competition both the facts of production as well as goods and
services are not perfectly mobile.

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More elastic demand: under monopolistic competition demand curve is more elastic.in order to sell
more, the firm must reduce its price.
Absence of collective action: under monopolistic competition, there is absence of collective action
by so many firms.
Price policy of a firm: there is price policy of different firms under monopolistic competition .while,
it lacks under perfect competition .under it, firm is only a features are absent under monopolistic
competition.
ASSUMPTIONS OF MONOPOLISTIC COMPETITION
 There are a significant number of sellers as well as buyers in the group.
 Products of the sellers are separated, however they are close substitutes of one another
 There is free entry as well as of the organization in the group.
 The objective of the firm is to maximize profits, both in the short run as well as in the long
run.
PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION
A) SHORT-TERM EQUILIBRIUM OF A FIRM
Short-term implies to the period where a firm is not able to regulate the supply of its product as per
the demand. Owing to this reason, a firm is not able to accomplish much taking into account its profit
situation in the short-run. Thus, in the short-run, there could be three contingencies concerning profit
(i) Abnormal profit, (ii) Normal or Zero profit, (iii) Loss.
Abnormal Profit. In short-run an organization could be capable of acquiring abnormalprofit only as
soon as the demand of the organization‟s product is extremely high and there is no close substitute to
its product. Under these circumstances, the organization can establish a high price for its product and
can acquire abnormal profit. This can be achievable only in the short-run as no new organization can
become involved in the market in the short-run.
Normal Profit or Zero Profit:If the demand of the organization‟s product is not extremely high, the
organization could acquire only normal profit once average revenue is a little more than the average
cost or zero profit as soon as average revenue and average cost are equal.
Loss: In short-run, a firm may have to suffer loss when demand of the product of firm is so weak that
the firm has to sell its product at a price less than its cost, in this case, average revenue of the firm is
less than its average cost.
B) LONG-TERM EQUILIBRIUM OF AFRIM
Long-term is the period where an organization could regulate the supply of its product as per its
demand. It is the period where new organizations can furthermore become involved in the market. In
this situation, an organization at all times acquires normal profit, as in case an organization is
acquiring abnormal profit in short-run new organizations will become involved in the market. It will
add to the supply of the product & consequently the price of the product will be declined.
In contrast if an organization is suffering a loss in the short-run, several organizations will leave the
industry.In this situation, supply of the product willdecline and price of the product will rise to the
level of average cost or a little more than the average cost. Consequently, the organization will

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acquire normal profit. Nevertheless, following two conditions should be fulfilled for the equilibrium
ofan organization in the long-run.
 Marginal cost as well as marginal revenue of all the organizations should be equal
 Average cost as well as average revenue of allthe organizations should be equal.
DEFECTS OR WASTES OF MONOPOLISTIC COMPETITION
EXCESS CAPACITY
It implies the amount of output by which the long run output of the firm under monopolistic
competition falls short of the Ideal output. This is considered as wastage in monopolistic
competition.
The excess capacity under imperfect competition emerges because of downward sloping demand
curve. It can be tangent only at the falling part of LAC. This means the greater the elasticity of this
downward sloping demand curve, lesser will be excess capacity.
A firm under monopolistic competition in long run equilibrium produces an output, which is less
than what is deemed socially optimum or ideal output. Society‟s productive resources are fully
utilized when they produce the output at minimum long run average cost. However, firm under
monopolistic competition operates at the output on the falling portion of LAC; which implies it is not
operating at minimum LAC point. However, under perfect competition the firm in long period
operates at minimum LAC i.e. Ideal output or socially optimum output.
Unemployment: Under imperfect competition, the production capacity of the firm is not
used fully. This implies that there is underutilization of capacity. This leads to unemployment.
Exploitation: Under imperfect competition the output is restricted, so that price is kept higher than
the marginal cost (AR>MC). The excess of the price on MC represents real
extra burden on the community i.e. exploitation. Under perfect competition this exploitation is not
possible as price is equal to AC and MC (AR=MC=AC)
Advertisement:Expenditure on competition advertisement is regarded as a waste of competition. It
is the result of imperfect competition because under perfect competition there is no need for such
advertisement due to homogenous products. However, under imperfect competition product is
differentiated and therefore advertisement becomes necessary in order to earn larger share in the
market.
Cross Transport:The existence of cross transport is another factor contributing to waste of
imperfect competition. A firm in India may be a selling a commodity in India while the same product
produced in India may be sold abroad. This is also the result of absence of perfect competition and
presence of product differentiates.
Specialization:Another waste of imperfect competition is the failure of each firm in India to
specialize in the production of those commodities for which it is best suited.
Standardization:Under imperfect competition, standardization which helps in reducing Cost is not
possible. No produce can take the rich producing particular design on larger.
Monopolistic Versus Perfect Competition
Excess Capacity
1. The quantity of output produced by a monopolistically competitive firm is smaller than the
quantity that minimizes average total cost (the efficient scale).

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2. This implies that firms in monopolistic competition have excess capacity, because the firm could
increase its output andlower its average total cost of production.
3. Because firms in perfect competition produce where price isequal to the minimum average total
cost, firms in perfectcompetition produce at their efficient scale.
Markup over Marginal Cost
1. In monopolistic competition, price is greater than marginal cost because the firm has some market
power.
2. In perfect competition, price is equal to marginal cost.
Microeconomics Macroeconomics
Individual Consumers and Firms.
The demand and supply of individual
goods and services.
The Overall Economy.
The aggregate demand and aggregate
supply for all goods and services.
Demand depends
on:
Supply depends on: Aggregate
demand depends
on:
Aggregate supply depends on:
Consumer
‟s
expectatio
ns of the
future.
Expectations of
profits by firms.
Household
s‟
expectatio
ns of the
future.
Producers‟ expectations
of future profits.
The price
of the
product in
question.
The price of the
good or service in
question
Interest
rates.
Productions costs.
Household
income
available.
Technology. Household
income.
Economic growth.
Household
accumulat
ed
wealth.
Costs of
production.
o Labor
o Raw
materials.
o Other
inputs.
Household
wealth.
Public policy:
o Business tax
rates.
o Regulation or
deregulation.
o Environmental
policies.
Consumer
tastes and
preference
s.
Business taxes
and subsidies.
Taxes and
tariffs.
Business taxes.
The price
of other
products.
Price of related
goods.
Consumer
indebtedne
ss.
Weather.
The
number of
The number of
suppliers.
The
number of
The number of firms.

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household
s
demandin
g a good
or service.
consumers.
Demand
for foreign
goods.
World
demand
for
domestic
goods.
Exchange
rates.
Microeconomics Macroeconomics
Equilibrium occurs when the quantity
demanded equals the quantity supplied.
Equilibrium in an economy occurs when
the aggregate demand equals the
aggregate supply.
There is a price for each good or service
that will clear the market.
There is a price level in an economy at
which the aggregate demand will equal
aggregate supply.
In macroeconomics:
There are no:
o Substitute goods or services.
o Complimentary goods and services.
o Normal goods and services.
o Inferior goods and services
=>There are just “aggregate goods and services”.
Ceteris paribus is not an issue in macroeconomics.
We do not care why consumers make individual choices. We are not concerned with:
o Price elasticity of demand.
o Budget constraints of consumers.
o Marginal utility of consumers.
Firms (producers) are simply firms (producers). We do not worry about whether a firm is:
o A perfect competitor.
o A monopolist.
o In monopolistic competition.
o An oligopolist.
We do not concern ourselves with the size or behavior of the firm in macroeconomics.
We still emphasize the concept of “opportunity costs”, but we now apply that concept to
whole economies or societies.
You will not hear the phrases “marginal cost” or “marginal revenue”. These two concepts
are not an issue in macroeconomics.

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REFERENCES
1. Reddy P.N. and Appanniah, H.R. “Principles of Business Economics”.
2. Su8ndharam, K.P.M. “Business Economics.
3. McGuigan, Moyer and Harris: Managerial Economics, West PublishingCompany
4. Peterson, Craig, H. and Lewis Cris, W. “Mangaerial Economic, Pearson,Education Asia.
5. Mehta, P.L., “Managerial Economics, Sultan Chand & Sons.
6. Maurise, Charles, S. Thomas and Others “Mangerial Economics applied Micro Economics for
Decision Making, Irwin.
7. Mote, V.L., Samule Paula nd G.S. Gupta, Managerial Economics , Concepts and Cases, Tata
McGraw Hill, New Delhi.