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Elective microeconomics for business

microeconomics for businessTU Board 2082

Write the conditions for equilibrium of a firm in monopolistic market in short run.

2

Answer

· Based on the official syllabus and past papers
Updated

In the short run, a firm in a monopolistic competition market achieves equilibrium under the following conditions:

  1. Marginal Revenue (MR) = Marginal Cost (MC) The firm maximizes profit where MR equals MC, ensuring optimal output.

  2. Price (P) > Average Cost (AC) The firm earns supernormal profit (P > AC) in the short run due to product differentiation and downward-sloping demand.

  3. Downward-Sloping Demand Curve The firm faces a highly elastic but downward-sloping demand curve, allowing some price-setting power.

  4. No Entry or Exit In the short run, firms cannot enter or exit, so existing firms adjust output to maximize profit.

Key Feature:

The equilibrium price exceeds marginal cost (P > MC), unlike perfect competition where P = MC.

QuantityPrice/RevenueOAR (Demand)MRMCQ*Q*P*P*
Short-run equilibrium in monopolistic competition (P* > MC at Q*).

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