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SS2: ECONOMICS - 2ND TERM

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Lesson 8, Topic 5
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Determination of Price and Output under Monopolistic Competition

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Short-run Equilibrium Position of Monopolist Competition

Short-run equilibrium under monopolistic competition maximizes their profit just like monopoly. In order to maximize profit, the firm will adjust its rate of production to the point where MC=MR.  If the firm earns supernormal profit it is because it is a new firm. The diagram shows the supernormal profit where MC and MR are equal at point E which indicates the equilibrium position. There are some possibilities where some firms incur a loss, these possibilities are expected with firms that charge higher prices on goods that are still new in the market.

Screen Shot 2020 12 31 at 8.11.49 PM

Long-run Equilibrium Position of Monopolist Competition

Longrun equilibrum under monopolistic competition enables the firm to witness stability. The market allows new firms to enter the market so that each firm’s demand curve shifts to the left. It will result in a sudation where the longrun equilibrium position will show that  P = LAC( price that is equal to longrun Average Cost) which states that the earnings will only be a normal profit that is shown in the diagram below. 

Note: Anytime the longrun average cost is above the price, a loss will be reflected or incurred.

Screen Shot 2020 12 31 at 8.17.30 PM

Evaluation Questions

1. State the features of monopoly.

2. Explain the Short run profit maximisation of a monopolist.

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