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The effect of supply and demand on market price and equilibrium under
monopolistic competition

Article · November 2018

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 The effect of supply and demand on market price and equilibrium under
monopolistic competition
Ramin Abolghasemi Komleh
University of Milan

Abstract
Monopolistic competition theory wrote with this assumption that the perfect competition market due to
homogeneity of goods and the pure monopoly market without near substitution, were not very close in
the real world; perhaps one of the main differences between monopolistic competition with other
markets is competition between producers (including non-price competition) in type of customer
attraction and integration of competition and monopoly is due to difference of this market structure with
perfect competition, in type of goods, brand, model, color, packaging and quality, which can create a
monopoly power for producer; however, monopolistic competition theory is basically a long-run theory
and in terms of short-run equilibrium, is similar to analysis of a pure monopoly firm; but question is
here that whether monopolistic competition generally is seen as a departure from the ideal of perfect
competition that results in a loss of economic welfare that is, a departure from Pareto optimality or
welfare ideal itself and description of reality, involves a blend of monopoly and competition and is
therefore correctly described as one of monopolistic competition? This paper is a brief overview from
the influence of supply and demand on the market price and equilibrium in monopolistic competition
market structure.

Key words: Monopolistic Competition; Supply; Demand; Price; Equilibrium

Introduction
Competitive Monopoly Theory wrote by Chamberlin and Robinson, with the assumption that the Perfect
Competition market due to the homogeneity of the goods and the Pure Monopoly market for without
near substitution was not very close in the real world and based on the organization of the more famous
markets. Perhaps one of the main differences in the Monopolistic Competition with other markets is the
competition between producers (including non-price competition) in the type of customer attraction,
and perhaps the choice of the name of this market with integration of competition and monopoly, which
have different meanings in terms of the closeness of the conditions of this market to the conditions The
perfect competition is limited by the difference in the type of goods produced in terms of brand, model,
colour, packaging and quality, which can create a monopoly power for producer, and despite the
increase in the price of goods and the presence of substitute products, to persuade consumers for
continue to consume their products.
According to Bellante (2004) “whether the discussion of imperfect or monopolistic competition centers
on Chamberlin or Robinson, monopolistic competition generally is seen as a departure from the ideal
of perfect competition that results in a loss of economic welfare that is, a departure from Pareto
optimality” (p.17).
But this is a true understanding of Chamberlain's position. Chamberlin (as cited in Bellante, 2004) in
explanation of monopolistic competition and economic welfare states that “the supremacy of pure
competition with its corollary of prices equal to marginal costs as the economic welfare ideal is well
known. . . .What is perhaps not so well appreciated is how explicitly monopolistic competition has been
interpreted as merely indicating the nature of the departures from the ideal which need to be corrected.
. . . The main point I want to make is that the welfare ideal itself (as well as the description of reality)
involves a blend of monopoly and competition and is therefore correctly described as one of
monopolistic competition” (pp. 21-22).

1
 The effect of supply and demand on market price and equilibrium under monopolistic competition | 2

Evaluation of Supply and Equilibrium in the Short-Run

The monopolistic competition theory is basically a long-run theory and in terms of short-run
equilibrium, is similar to analysis of a pure monopoly firm, and the criterion of the maximum profit
margin of the firm is the point of production, in which the Marginal Revenue MR is equal to the
Marginal Cost MC and the MC's curve slope be more than MR. Due to a better geometrically
comparison, the situation of perfect competition, pure monopoly and monopolistic competition curves
from the viewpoint of short-run equilibrium are plotted together. (Figure 1.1)

SMC SMC SMC

SAC
P Profit maximization P Break-even point P Loss point
P > AC P = AC SAC P < AC
PX

PX PX

MR=MC SAC

MR=MC D MR=MC D
D

O Q O Q O Q
QX QX QX
MR MR
MR
Short-run profit Break-even Loss
maximaization in
Figure 1.1 All situation of monopolistically competitive firm in the short-run

Long-Run, Profit or Loss; a Big Decision for Future

Long-run equilibrium of a Monopolistic Competition firm in the market due to the existence of a large
number of firms that have a close competition in the sale of their productive products is examined by
drawing two demand curves (the actual and expected demand of each firm). Due to the competitive
environment between manufacturers in this type of market, a firm always with increasing price, loses a
large number of its customers due to the existence of other manufacturers who supply the above-
mentioned brand with their brand and quality because the consumer It can buy its own goods at a lower
price than other firms. In monopolistic competition markets, the actual demand is constantly due to the
firms' influence on each other, as expected has more slope and less elasticity and maybe that is why
many firms in the long run get out of the market as a result of market losses that I will continue for
reasons. Increasing supply with the aim of maximizing profit by a firm with an impact on the increase
in the production of other producers will lead to increase in supply and a decrease in demand and hence
a decrease in prices. (Figure 1.2)
D3 D2 D1
D
P P
D´
E1
P1
E
P1
P3
E2
P2 T U LAC
P2 V
J J´

Pe E3 D3´
D2´
O O
Q Q
Q1 Q3 Q2 Q3 Q2 Qe

TR = TC, P = AC Long-Run equilibrium point

Figure 1.2 Figure 1.3

maximaization in maximaization in
 The effect of supply and demand on market price and equilibrium under monopolistic competition | 3

In the Monopolistic Competition market, earning profits by an enterprise, leads to the arrival of other
producers and an increase in supply, resulting in a reduction in demand and shift in demand curve to
the left from D1 to D2 and falling prices to the point where the demand curve tangent for the long–run
average cost and ending up (D2 to D3) receive to break-even point, as a result all firms have begun to
increase their production and supply with the idea of reaping profits that this volume of supply exceeds
the amount of demand and price in the market and causing losses to some active enterprises and firms
try to achieve a level of production through price reductions, at which prices are equal to the cost of
producing each product unit and the real demand curve is shift to the right (D3 to D2). Therefore, the
long-run equilibrium point of each firm is the tangent point of the expected demand curve for the long-
run average cost curve LAC. (Figure 1.3)

D1 D2 D3 is actual demand curve and D´2 D´3 is perceived demand curve.

OP1EQ1 OP2VQ2 Total profit

(OJJ´Q1) (OTUQ2) Total cost
P1E1JJ´ (P2TUV) Pure profit or loss

In another case, according to Figure 1.4, the firm was positioned in the short-run equilibrium (point E1)
for gaining profit to equivalent of (Pe1E1GH) and sought to increase its profit by adding a production
level corresponding to its expected demand curve, which causes of the increase in the supply by other
producers and the drop price of the product on the market and the demand for all firms instead of moving
on the expected demand curve, move on the real demand curve and will go down somewhere, as in the
previous situation at the long-run equilibrium point E2 tangent on the LAC curve and come to break –
even point. In the event of a further reduce in the price of the real demand curve, expected demand
curve move to under the LAC curve, they will cut off each other and lead to net losses for all firms and
will force them to rise of price and shift of firm's expected demand curve to upwards.

OPe1E1Qe1 Total profit

(OGHQe1) Total cost
Pe1E1GH Pure profit D
d´ P = AC Break-even point
P
E1
Pe1
LAC
d˝
H E2
G
Pe2

Perceived demand curve

Actual demand curve
O Qe1 Qe2 Q

Figure 1.4
maximaization in

The best level of production is achieved when the difference in the product's sales from the LAC will
be in maximum. In other words, the best production level is at the MR = MC point and sales on the
demand curve. As described in the previous section, the long-run profits in the monopolistic competition
market have pushed other firms into the market in the long run and reduced the profitability of all
producers, and the transmission of the AR and MR curves to downwards and this decrease to that point
It continues that the AR curve is tangent to the LAC curve and the firm will be placed at the break-even
point, which is the long-term equilibrium point in the monopolistic competition in which P = LAC. In
a loss situation of a firm, due to the leave of many firms from the market in the long-run, the equilibrium
condition P = LAC done again. (Figure 1.5)
 The effect of supply and demand on market price and equilibrium under monopolistic competition | 4

D2
LAC
Y d0
Incur hypothetical point
P1
d1 LAC
d2
P2
E
P3

d´0
d´1
D´1 D´2 d´2
O Q1 Q2 Q3 Q4 Q5 Q6 X
Figure 1.5 Long –run equilibrium under monopolistic competition when perceived demand curve tangent on the LAC curve

Of course, in the monopolistic competition market of producers through non-price competition and the
adoption of advertising, marketing, and qualitative policies changes in order to understand the consumer
in the characteristics of their products, they will be able to raise their production levels and demand
without increasing their prices. (Figure 1.6)
D˝
P
AC AC˝
P2

P0
AC´
P1

D´
D
O Q0 Q2 Q1 Q
Figure 1.6
References maximaization in

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