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Price Determination Under Monopolistic Competition

>> June 26, 2011

 In the time of inflation, to determine selling price is one of main challenge for a manager because today real market is of monopolistic competition. A little mistake can be loss of big number of customers. So, it is the duty of manager to get the advice of cost accountant, management accountant and economists of finance department. Economist thinks different factors instead of  just seeing historical accounting data. He analyzes the the total quantity of demand and supply and tries to see its effect in monopolistic. So, today content is based on economics and you will learn "how to determine price under monopolistic competition."

In monopolistic competition, we can divide market on the basis of product differentiation. It is situation in which there are lots of seller and lots of buyer. But they do not sell same product. Every seller's product will be different on the basis of quality, brand or trade mark. So, in this market, both monopoly and perfect market's feature will be exist. Every seller will take different price for his product. But seller will also try to get best price than other competitors of market. That is the reason, in this market, price will not be fixed at the equal point of quantity demanded and quantity supplied. Price will be determined at the point where marginal revenue is equal to marginal cost. Economist gets the help of cost accountant for getting all past and relevant data relating to marginal cost, average cost, fixed cost and average variable cost. I have already explained all these concepts in cost accounting when I had taught you marginal costing chapter. So, economist will determine the price after accepting following two condition.

1st Condition = Marginal Revenue will be equal to Marginal Cost

2nd Condition = Marginal cost curve cuts marginal revenue curve from below.

At that time, company will get following things :

1st : Company will get Super Profit 

Economist will advice that company will get super profit if he will see the average cost curve below the the average revenue curve. We know that super profit value will be calculated on the basis the excess of average revenue over average cost.

2nd Company will get Normal Profit 

Economist will advice that company will get normal profit if he will see that  the average cost curve is touching average revenue curve. At that time, we will have to survive because our both fixed cost and variable cost are getting from sale of products. So, there is no need to worry at that point.

3rd Company will get Minimum Loss

Economist will advice that company will face minimum loss of fixed cost due to less demand and over production. He can give this report after seeing average cost curve above the average revenue curve. If he will deeply study, he will find that at this point, company will receive average variable cost from his average revenue because average revenue will equal to average variable cost. 
Above three situation may be of his performance but equilibrium must be at the point where company's marginal cost will equal to marginal revenue.
Following presentation will be helpful to learn this concept deeply.

Related : Price Determination Under Monopolistic Competition Video Tutorial

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