Enter your email id to get regular update free
Login
Your Email
Pasword
Home
Write
Trending
History
Liked
Earning

Short Run and Long Run Equilibrium of the group under monopolistic competition

Here we understand with diagram the short run and long run equilibrium of the group under monopolistic competition in detail.

Short Run and Long Run Equilibrium of the Group under Monopolistic Competition
Before we start discussing about the short run and long run equilibrium of the group under monopolistic competition, firstly we understand what is group consists of as follows-
An industry consists of all those firms which produce a homogeneous product.
Group is composed of firms which produce differentiated products.
  1. Short Run Equilibrium of the Group: The short period group equilibrium under monopolistic competition is similar to short period industry equilibrium under perfect competition. In the short run equilibrium under monopolistic competition, various firms comprising the group produce that level of output which maximises profits or minimises losses. Means, it is possible that some firms may be earning supernormal profits, some may be earning normal profits, while some may be incurring losses. suppose if some of the firms are earning supernormal profits there will be tendency for the new firms to enter the group and compete away the supernormal profits. On contrary, if some of the firms are incurring losses there will be tendency on the part of some firms to leave the group. Hence, it is possible for the firms in the group to be in short run equilibrium by producing that output which maximises profits or minimises losses. It will be very less likely that group will be in full equilibrium in the short run because such a full equilibrium can be attained only when there is no tendency on the part of the new firms to enter the 'group' or for the existing firms to leave the group.
  2. Long Run Equilibrium of the Group: The long run equilibrium of the group under monopolistic competition is attained when there is no tendency for the number of firms composing it to increase or decrease. It means, the size of the group remains unaltered, new firms do not have any incentive to enter the group and the existing firms have no tendency to leave the group. It will happen only when all the firms are earning normal profits. If some of the firms in the group are earning supernormal profits, these will be competed away by the entry of new firms. Likewise, if some firms are not able to earn normal profits that is incurring losses, they leave the group. This process of entry or exit of new or old firms will continue till all the firms in the group are earning only normal profits. This is clearly explained as shown in below mentioned figure-
As shown in figure, under perfect competition, the industry in the long run will consist of firms which are of optimum size, each producing at minimum average cost, under monopolistic competition the group in the long run will consist of firms which are less than optimum size, each producing at a higher average cost, that is, the firms stop expanding production even though average cost is falling.
Short Run Equilibrium of the Group under Monopolistic Competition
Long Run Equilibrium of the Group under Monopolistic Competition
What is Industry?
What is Group consists of?
Supernormal profits
Maximum profits
Minimum losses
Short Run and Long Run Equilibrium of the Group under Monopolistic Competition
Kinnari
Tech writer at NewsandStory
Total 427 views