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Increase In Monopolistic Competition

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In monopolistic competition, the industry consists of many firms competing each other, and each firm practices product differentiation with a product that is slightly different from the products of competing firms. Firms are free to enter and exit the industry. The product differentiation enables firms to compete on product quality, price and marketing. To stay in the industry for a considerable period, the firm must maximize its profit. Because of product differentiation, a firm in monopolistic competition faces a downward-sloping demand curve. So, the firm can set both its price and its output with a trade-off between the product quality and price. A firm that makes a high-quality product can charge higher price than a firm that makes a low-quality …show more content…

The marginal revenue (MR) curve shows the marginal revenue associated with the demand curve for the jackets. The curves ATC and MC represent respectively average total cost and marginal cost for producing jackets. As per the diagram 4.1, the economic profit is maximized when marginal revenue (curve MR) equals marginal cost (curve MC), which is achieved at the level of output of 125 jackets per day at the marginal cost of R500 per jacket. The average total cost for producing 125 jackets is R250. As per the given demand curve, the price that the buyers are willing to pay for the given quantity of 125 jackets is R750, hence the company can charge buyers this price with an economic profit of R500 per jacket (R750-R250= R500) to get maximum profit for the quantity produced at an average total cost of R250 per jacket. If the company sells 125 jackets at a price of R750, it can make an economic profit of R62,500 a day (R500 per jacket multiplied by 125 jackets a day) in the short run.
Pricing and output strategy in the long run to stay in the industry
In monopolistic competition, there is no restriction on entry of other firms, so if firms in a jacket industry are making economic profits, other firms will be attracted to enter that industry. As other firms start to make jackets like those made by my company, the demand of jackets of my company decreases as shown in Figure 4.2. One can see from this figure that the demand curve for the jackets and the marginal revenue curve have shifted leftward as compared to Figure 4.1. When these curves shift leftward, the profit maximizing quantity and the price of the jackets will

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