Monopolistic competition is a particular market structure which means there are a large number of small firms and companies whose products and services are slightly differentiated with other competitors. (Stephen, I& Stuart, W. 2007: 147) Such as food market, apparel market, light industry product market. The characteristics of monopolistic competition can divided into several parts. As Hunter (1969:19) said, to begin with, product differentiation includes both internal and external differences. Internal differences contain quality, capability and so on. External differences contain packing, advertising and so on. Moreover, the consumption of firms and industries are more. In addition, it is more easily for companies to enter the market due to no requirement for too much investment and no need for high technology. Furthermore, manufactures have a slight impact on prices which causes high influence in short run and low influence in long run. Last of all, they face the downward sloping section of its curve which means the elasticity is less than perfect competitive market and more than pure monopolistic market. Monopolistic competition is also called imperfect competition that combines the characteristics both of perfect competition and monopoly. In perfect competition, goods and services are identical so that firms can entry freely. In contrast, pure monopoly just has a single seller because their goods are unique and firms who have monopolistic power are as a price maker. Unlike these two structures, monopolistic competition has its own features between them.
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Long run defined that in a long period of time, whole scale of production can be varied. Normal profit is the minimum amount required to keep a firm in its current line of production. Monopolistic competition in the long run allows firms enter and exit until they are making exactly zero economic profit. From the diagram, it is easily to see the existence of supernormal profit gives much more freedom to the industry who wants to enter, and then the competition makes firms earn normal profit in the long run. To analyze the figures, firstly, consumers need to pay higher price than that paid in perfect competition because of the average cost curve is above the minimum point. (Stephen, I& Stuart, W. 2007: 149)Secondly, price exceeds marginal cost which leads to more profit for the monopolistically competitive firm. Thirdly, there is excess capacity in the monopolistic competition in the long run. E which shows that the average cost curve is tangential to the demand curve is a balanced point. F shows the average cost at the minimum level. This situation causes the demand and marginal revenue curves move to the left. (Stephen, I& Stuart, W. 2007: 149)While at the same time, the market system reaches the equilibrium which illustrates that no encouragement for new firms to entry and no encouragement for former companies exit.
What is most important is to analyze the process of the monopolistic competition in the long run. There is an explanation illustrates that the super profits induce other firms to enter, because of barriers is small, other manufactures can through the imitation and innovation to start making a profit market faces decline in demand. As a result, the curve happen a movement in order to become more elastic and flexible. (Huge, G. & Ray, R. 2004:187) Assume there is no changeable for cost curve and move the demand curve to the balanced point which is tangential to the average cost, until the prices equals to costs, resulting in profits for the long run equilibrium state of zero.
There are many possible reasons for why monopolistic competitive market structure can only make normal profit. For example, first and foremost, the main reason for that is the supply increases, but at the same time the demand of products or services are stay in the same level, so there are surplus for industries. In order to sell products, supplier will decrease the price which may gives them chances to attract consumers and put losses to a minimum. When the prices fall as same as the cost, firms can just get the normal profit. (Shepherd, W. G. & Shepherd, J. M. 2004:43)In addition, more and more firms enter the market system, because it is easy and no barriers so that firms are just do like other former firms, as time goes by, no innovation causes consumers do not have any more demand for goods which also lead the decreased price. Furthermore, in the long run, on the one hand, firms can not easily to cancel the large amount of investment. On the other hand, firms need to change all factors of production to get more capacity which is very difficult. Last but not at least, although the products of monopolistic competition are different from each other but they still can be instead of other products. If other firms which can produce better quality goods appear, people will more likely to buy. In this situation, old firms need to change their price into low degree so that they can make sure their losses are in a minimum point.
Hunter (1969:161) emphasizes that a company just make normal profit can continue its business. The key points to keep balance are demand curve is tangential to average cost, Po=AC and MR=MC. For instance, real estate market now is belonging to monopolistic competitive market. There are many kinds of real estate market which are different but still have some similarities. In these markets which have smaller differences between each other, there will be more competitions. Most of the real estate sellers try to get power to close to monopoly which can reduce more competitions. Change the quality of goods and rise up the promotion are two methods that always seen in society. But just in a short run, they can get abnormal profit unless they become pure monopoly.
To conclude, monopolistic competition is a special market structure which related to its features and characteristics. The profit they can make in long run is only the normal profit which depends on the reasons above. It is a nature process and phenomenon.
References:
Hunter, A. (1969). Monopoly and competition. Penguin, Harmondsworth.
Huge, G. &Ray, R. ( 2004). Microeconomics. Harlow: Prentice Hall/ Financial Times.
Stephen, I. & Stuart, W. (2007). Economics. Great Britain, Ashford Colour Press, Hampshire.
Shepherd, W. G. & Shepherd, J. M. (2004). The economics of industrial organization. Long Grove, Ill.: Waveland Press.
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