Answer to Question #130321 in Microeconomics for Thabisile

Question

Explain, with the aid of a graph, the short run equilibrium position of a firm
operating in the monopolistic competitive market structure”.

Answer 1

Monopolistic competition

Monopolistic competition is characterized by an industry in which many firms offer products or services that are similar, but not perfect substitutes.

Short-run equilibrium in monopolistic competition

Under the short-run equilibrium position of a firm operating in monopolistic competition abnormal profits can be made.

Example:

For instance in a telecommunication industry, a new firm produces a new phone. If the phone enters the market and sells well, demand will increase in the short run faster than supply since it will take time to ramp up production as new employees need to be hired and new machinery purchased. In the long run though, supply becomes normal and producers start earning normal profits.

AR=Average revenue curve

MR= Marginal revenue curve

SAC=Short run average cost

SMC=Short run marginal cost.

As seen in the diagram above, In the short run, an organization under monopolistic competition attains its equilibrium where marginal revenue equals marginal cost and sets its price according to its demand curve. This implies that in the short run, profits are maximized when MR=MC