Monopolistic Competitive Market

Running head: PROFIT DETERMINATION IN MONOPOLISTIC COPMETITIVE MARKET
PROFIT DETERMINATION IN MONOPOLISTIC COPMETITIVE MARKET
Name of student:
Name of University:
Author Note:

1PROFIT DETERMINATION IN MONOPOLISTIC COPMETITIVE MARKET
Monopolistic Competitive Market
Monopolistic competitive market is a market structure that is a combination of monopoly
and perfectly competitive market such that there aremany producers selling different selling
similar but differentiated products. It is widely used by businesses like hotels, restaurants,
retailing, consumer services andclothing as products are differentiated by price, advertisements,
design, technology and knowledge and are not perfect substituites of each other. There is free
entry and exit in the market with elastic demand and firms have the potential to extract profits
(Parenti, Ushchev, &Thisse, 2017). Therefore, it is important to understand how profits are
determined in monopolistic competition as the market is efficiently growing.
Determination of Profit
As the products are differentiated, firms have inelastic demand and the demand curve is
downward sloping. If the products are less differentiated, elasticity of demand will be more.
Thus, demand curve is the average revenue curve. Marginal revenue curve will have twice the
slope of demand curve and lies inside it (Dhingra and Morrow, 2019). Marginal cost (MC) is
upward sloping. Average total cost (ATC) is U-shaped because there initially when the quantity
is low there is fixed cost, then as the quality goes up AR reduces and reaches a point where ATC
equals MC after which ATC goes up.

2PROFIT DETERMINATION IN MONOPOLISTIC COPMETITIVE MARKET
AR
MR
ATC
MC
Quantit
y
Price
Qa
P
aP
A
Figure 1: Short run profit of monopolistic firms
Source: (As created by author)
Firms produce at points where MC intersects the MR because then opportunity cost on
each incremental unit will be greater than the revenue and might lead to economic loss. Quantity
will be at Qa and price will be Pa. The firm will earn an economic profit that is denoted by PaPA
region because Pa exceeds MC and ATC.