According to monopolistic competition market, a market compositionwhich consist several small firm who all have minimum share and barriers entryare low also has characteristics of perfect competition expect the identicalmanufactured goods. In Simply, Firms are neither price stealer nor price creator.And also this market have many producer for selling their product which aredifferentiated for each other due to quality ,brand ,feature ,location but notgood as substitute one.
For example: Nissan, Toyota, Honda & BMWThese all above mention Cars manufactures are multinationalcompany and they are identical because of product differentiation (Price,Quality, Design, Reliability, Features ,packaging and brand image).They do worldwide marketingand selling .Another important characteristic of this market is profit maximization which expand their production until marginalcost is equal to marginal revenue. MarginalCost (MC) = Marginal Revenue (MR)This essay argues that car manufactures are constantlyintroducing new models because such strategy might easily create an immediatepositive reaction from consumer as wellas best way to make product difference (such as features, reliability, andquality, from other competitor and increase sales. Following table and graphrepresent car sales per week (Honda) According to table and graph, if the marginal cost ofselling is less than marginal revenue Car Company have to increase output .
Insecond 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 pointprofit increased by $10.As Honda sell more car, growing marginal cost willultimately equal marginal revenue where company achieve profit maximizing byselling more car .This outcomes happens in fourth week we can see marginal cost is 150 and marginalrevenue is $ 150 . And Economic profit is $120.12, the point where Mc= MR. Thevertical line drawn from 13 up to demand curve show us selling price of car manufacturewhich is $270 .
Therefore profit-maximizing quantity is 13 and profit–maximizing price is $ 270.If Honda company increase their product selling 13to 14, price will increase by $ 150 to %160 which $10 more but profit will beshifted from $ 120 to $90.02. Similarly, if they increase quantity sells from14 to 15 marginal cost will be increase where as marginal revenue decreaserespectively and they bear economical loss.
Even though Honda company is rapidly selling their new modelin the market they can achieve economic profit only when MR =MC in amonopolistic market in short run. Honda company contiouslybrings differentiate product for eg:Jazz ,City and Accord.Jazz model has limited time offer same as city model but each model are designeddifferently with an incredible combination.
The main key pointto earn economic profit in long runmonopolistic competition market is to innovate differentiate product or either to sell a produce product in lower cost in thecomparision to competitors. According to abovegraph, the vertical line which intersects marginal revenue and drawn up todemand curve represents price of product. In long run demand is more digressionto the average cost curve; price is equal to average cost as a result firm is in breaking even point and lose economicprofit. Demand curve is more elastic in this market because there are so manycar manufacture .If they increase price of car the demand curve will shiftedto the left because customer will be change theirselection and choose substitute model.