According to monopolistic competition market, a market composition
which consist several small firm who all have minimum share and barriers entry
are low also has characteristics of perfect competition expect the identical
manufactured goods. In Simply, Firms are neither price stealer nor price creator.
And also this market have many producer for selling their product which are
differentiated for each other due to quality ,brand ,feature ,location but not
good as substitute one.
For example: Nissan, Toyota, Honda & BMW
These all above mention Cars manufactures are multinational
company and they are identical because of product differentiation (Price,
Quality, Design, Reliability, Features ,packaging and brand image).They do worldwide marketing
and selling .Another important characteristic of this market is profit maximization which expand their production until marginal
cost is equal to marginal revenue.
Cost (MC) = Marginal Revenue (MR)
This essay argues that car manufactures are constantly
introducing new models because such strategy might easily create an immediate
positive reaction from consumer as well
as best way to make product difference (such as features, reliability, and
quality, from other competitor and increase sales.
Following table and graph
represent car sales per week (Honda)
According to table and graph, if the marginal cost of
selling is less than marginal revenue Car Company have to increase output .In
second and third week marginal cost is $180 and $160 where marginal revenue is
$190 and $170 respectively where profit increase by $110 to $120.In this point
profit increased by $10.As Honda sell more car, growing marginal cost will
ultimately equal marginal revenue where company achieve profit maximizing by
selling more car .This outcomes happens in fourth week we can see marginal cost is 150 and marginal
revenue is $ 150 . And Economic profit is $120.12, the point where Mc= MR. The
vertical line drawn from 13 up to demand curve show us selling price of car manufacture
which is $270 .Therefore profit-maximizing quantity is 13 and profit
–maximizing price is $ 270.If Honda company increase their product selling 13
to 14, price will increase by $ 150 to %160 which $10 more but profit will be
shifted from $ 120 to $90.02. Similarly, if they increase quantity sells from
14 to 15 marginal cost will be increase where as marginal revenue decrease
respectively and they bear economical loss.
Even though Honda company is rapidly selling their new model
in the market they can achieve economic profit only when MR =MC in a
monopolistic market in short run.
Honda company contiously
brings differentiate product for eg:
Jazz ,City and Accord.Jazz model has
limited time offer same as city model but each model are designed
differently with an incredible combination. The main key point
to earn economic profit in long run
monopolistic competition market is to innovate differentiate product or either to sell a produce product in lower cost in the
comparision to competitors.
According to above
graph, the vertical line which intersects marginal revenue and drawn up to
demand curve represents price of product. In long run demand is more digression
to the average cost curve; price is equal to average cost as a result firm is in breaking even point and lose economic
profit. Demand curve is more elastic in this market because there are so many
car manufacture .If they increase price of car the demand curve will shifted
to the left because customer will be change their
selection and choose substitute model.