Explain the monopolistic excess capacity, Microeconomics

Assignment Help:

Theories of Chamberlin’s monopolistic competition and Joan Robinson’s imperfect competition have revealed that a firm under monopolistic competition or imperfect competition in long run equilibrium produces an output which is less than socially optimum or ideal output. This means that firms operate at the point on the failing portion of long run average cost curve, that is, they do not produce the level of output at which long run average cost is minimum. Long run equilibrium of a firm under monopolistic competition is achieved when the demand curve facing a firm becomes tangential to the long run average cost curve so that it earns only normal profits. Under such circumstances a firm can reduce average cost by expanding output to the minimum level of long run average cost, but it will not do so because its profits are maximized at the level of output smaller than at which its long run average cost is minimum.

Society’s productive resources are fully utilized when they are used to produce the level of output which renders long run average cost minimum. Thus a monopolistically competitive firm produces less than the socially optimum or ideal output, that is, the output corresponding to the slowest point of long run average cost curve. This is in sharp contrast to the position of the firm in long run equilibrium under perfect competition, which operates at the minimum point of the long run average cost curve. The amount by which the actual long run output of the firm under monopolistic competition falls short of the socially ideal output is a measure of excess capacity which means unutilized capacity.

Long run equilibrium of a firm under monopolistic competition is achieved when the demand curve facing a firm becomes tangential to the long run average cost curve so that it earns only normal profits. Under such circumstances a firm can reduce average cost by expanding output to the minimum level of long run average cost, but it will not do so because its profits are maximized at the level of output smaller than at which its long run average cost is minimum. Therefore, the firm is producing MN less than the ideal output. Thus MN output represents the excess capacity refers only to the long run. This is because in the short run under any type of market structure (including perfect competition) there can be all sorts of departments from the ideal reflecting incomplete adjustment to the existing market conditions.


Related Discussions:- Explain the monopolistic excess capacity

How to calculate the cpi index, When measuring price levels in the economy ...

When measuring price levels in the economy (such as when calculating the CPI index), why is a weighted average used? Because we require giving greater emphasis to prices at whi

Describe the different pricing strategies of firms, Question: (a) With...

Question: (a) With reference to the characteristics of market structure, describe why the market for powdered milk in Mauritius is an appropriate example of monopolistic compe

How can create more accurate measurements of development, Why and how are e...

Why and how are economists attempting to create more accurate measurements of development? The why part is simply because of the complexities built-in to the concept of develop

Direct utility, what is direct utility in micro economics?

what is direct utility in micro economics?

Keynesian model, in the keynesian model the price is assumed to be what? a....

in the keynesian model the price is assumed to be what? a.exogeneous and remaaining constant b. endogeneous and remaining constant which is correct?

Surplus, Surplus The surplus is a condition under that supply for a goo...

Surplus The surplus is a condition under that supply for a good or service is in excess of the demand for that good or service. When this happens, there is commonly a reduction

Inflation, how measure the inflation

how measure the inflation

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd