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Group Equilibrium | Monopolistic Competition and Economic Efficiency (Eng Rec.)
Abstract
Group is a collective form of several firms. In the long-run equilibrium under monopolistic competition, the group is characterized by excess capacity. Excess capacity is the difference between optimum output and the actual output in the long-run equilibrium. The optimum output of a firm has been regarded to be the output where the long-run average cost is a minimum. We can define Excess Capacity = Optimum Output - Actual Output.
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Group Equilibrium
Under perfect competition, there are a large number of firms producing homogeneous products. Collectively, these firms are called industries. Under monopoly, there is only one firm. There is no question of industry or group. Under monopolistic competition, many firms are producing close substitutes. In other words, there is product differentiation. Chamberlin has used the term "group" instead of industry, for the group of such firms as produce differentiated products. For example, a group of firms manufacturing toilet soaps or toothpaste.
Determination of Group Equilibrium
For the sake of simplicity, we study group equilibrium based on two assumptions:
(i) Demand and costs of all the firms of a group are the same.
(ii) Number of firms in the group is so large that no individual firm by its own decision can influence the price and output of other firms.
Group equilibrium is explained diagrammatically in Fig. 7.
In Fig. 7, DD is the demand curve and CC is the cost curve. Each producer would like to fix a price equal to OA because, at this price, the difference between revenue and cost is the maximum. Such a price will yield super normal profits equivalent to BARG. This super normal profit will tempt many new firms to join the group. Consequently, the total market demand will be distributed among several sellers. This will make the demand curve shift to the left as D1D1. The number of producers will go on increasing until the D1D1 curve becomes tangent to cost curve CC. This will happen at point E. No firm will now earn super normal profits. Each firm of the group will, in this situation, be in equilibrium. OB will be the equilibrium price of the group...
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By Sivananda PandaAbstract
Group is a collective form of several firms. In the long-run equilibrium under monopolistic competition, the group is characterized by excess capacity. Excess capacity is the difference between optimum output and the actual output in the long-run equilibrium. The optimum output of a firm has been regarded to be the output where the long-run average cost is a minimum. We can define Excess Capacity = Optimum Output - Actual Output.
Visit Website: Commerceya
Subscribe on Youtube: Commerceya
Group Equilibrium
Under perfect competition, there are a large number of firms producing homogeneous products. Collectively, these firms are called industries. Under monopoly, there is only one firm. There is no question of industry or group. Under monopolistic competition, many firms are producing close substitutes. In other words, there is product differentiation. Chamberlin has used the term "group" instead of industry, for the group of such firms as produce differentiated products. For example, a group of firms manufacturing toilet soaps or toothpaste.
Determination of Group Equilibrium
For the sake of simplicity, we study group equilibrium based on two assumptions:
(i) Demand and costs of all the firms of a group are the same.
(ii) Number of firms in the group is so large that no individual firm by its own decision can influence the price and output of other firms.
Group equilibrium is explained diagrammatically in Fig. 7.
In Fig. 7, DD is the demand curve and CC is the cost curve. Each producer would like to fix a price equal to OA because, at this price, the difference between revenue and cost is the maximum. Such a price will yield super normal profits equivalent to BARG. This super normal profit will tempt many new firms to join the group. Consequently, the total market demand will be distributed among several sellers. This will make the demand curve shift to the left as D1D1. The number of producers will go on increasing until the D1D1 curve becomes tangent to cost curve CC. This will happen at point E. No firm will now earn super normal profits. Each firm of the group will, in this situation, be in equilibrium. OB will be the equilibrium price of the group...
Read More...