10.3. Determination of price, profit and output in the short and long term
Let's analyze the behavior in determining the price and volume of production of firms operating under conditions of monopolistic competition. The degree of elasticity of the company's demand curve under these conditions will depend on the number of competitors and the degree of product differentiation. The more the number of competitors and the weaker the differentiation of the product, the greater the elasticity of the demand curve of each seller, i.e. the more the situation will approach clean competition.
The firm will maximize its profits or minimize losses in the short term, producing a volume of output that is indicated by the intersection of the marginal cost and marginal revenue curves. It produces the volume of output, assigns a price and is lucky enough to get the aggregate profit (Figure 10.1a). But there may be a less favorable situation with costs and demand, putting the company in a position in which it incurs losses in the short term. This is illustrated in Fig. 10. 16.
It follows from the figure that economic profits will prompt new firms to enter the industry, but eventually they will be eliminated during the competition (Figure 10.1a). Losses will cause a massive exit of firms from the industry until normal profits are restored (figure 10.16). Thus, if the price simply covers the costs per unit of output with the volume of output for which МЯ = МС, the equilibrium position is reached in the long-term period (Figure 10.1).
In the long run, for firms operating under monopolistic competition, there is a tendency to get a normal profit, or, in other words, to break even. It is likely that the equilibrium that provides a normal profit in this period is an acceptable representation of reality.
Firms in terms of monopolistic competition can receive profits or incur losses in the short term. The condition of easy entry and exit from the industry causes a tendency to receive them a normal profit in the long-term period.
Fig. 10.1. Trends in obtaining a normal profit: a - profit in the short term; b - loss in the short term ; in - long-term equilibrium
In a long-term period under monopolistic competition, the price exceeds marginal costs, which means under-allocation of resources for a given product. Excess of the price over the minimum average gross costs indicates that consumers do not receive the product at the lowest price that the conditions of costs would allow. However, since the firm's demand curve is highly elastic, these costs of monopolistic competition should not be overemphasized.
10.4. Maximizing profits
The goal of a monopoly is to maximize profits by controlling the price and volume of production in the market. The means of achieving the goal - a monopoly price that provides profit and is a form of effective realization of the monopoly's potential in the market.
In the short term, the firm will maximize profits (minimize losses), producing a volume of output that is at the intersection of the marginal cost and marginal revenue curves (Figure 10.2).
Fig. 10.2. The process of establishing equilibrium in the monopoly market : P - monopoly foam; A - the price of perfect competition; ЛЛ'- a curve of demand for the goods; NM - the curve of marginal revenue;/yY - level of production costs; PMLR - additional or monopoly profits
In order to obtain an aggregate profit, the firm produces a certain volume of output and assigns a price. But there may be a less favorable situation with costs and demand, placing it under monopolistic competition in a position in which it incurs losses in the short term. Consequently, in the short term the firm can receive either profit or loss.
In the long-term period, for firms operating under these conditions, there is a tendency to break even, as the price exceeds the minimum average gross costs. This indicates that consumers do not receive the product at the lowest price that the conditions of monopolistic competition costs would allow.
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