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Price-output determination in monopolistic competition

Under monopolistic competition, the firm will be in equilibrium position when marginal revenue is equal to marginal cost. So long the marginal revenue is greater than marginal cost, the seller will find it profitable to expand his output, and if the MR is less than MC, it is obvious he will reduce his output where the MR is equal to MC. In short run, therefore, the firm will be in equilibrium when it is maximizing profits, i.e., when MR = MC. Since the goods sold are differentiated and the concept of uniform pricing does not prevail, each firm is a price maker and is in a position to determine the price of its own product. Thus, the demand curve of the firm is downward sloping. Generally, the less differentiated the product is from its competitors, the more elastic the curve will be.

Conditions for equilibrium of an individual firm

  • MC = MR
  • ƒMC curve must cut MR curve from below
Both, AR and MR curves are downward sloping. It is the position of the AC curve that helps to know whether the firm is making profits or incurring losses.

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