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Surplus Capacity Under Monopolistic Competition

   Surplus Capacity under Monopolistic Competition

            The subsistence of surplus capacity under monopolistic rivalry can be understood from the below presented diagrams. The diagram 1 represents the long run position of a perfectly rivalled industry which is in long run symmetry at the level of productivity ON respective to which long run average cost is minimum.

            It is at productivity ON that the double condition of long run symmetry namely Rate = MC = AC is satisfied. It is therefore, clear that industries under perfect rivalry manufacture socially ideal productivity. Alternatively, an industry under monopolistic rivalry depicted in the first diagram is in long run symmetry at productivity OM at which its marginal revenue parities to marginal cost and rate parities to average cost Average revenue curve AR is tangential to average cost curve LAC at point F relative to productivity OM.

           It is to be noted that at productivity OM long run average cost LAC is still dropping and goes on dropping up to productivity ON. This entails that the industry can enlarge its manufacture up to ON to decrease his long run average cost to the minimum.

          Perfect productivity is the productivity at which long run average is minimum. Thus, the industry is manufacturing MN less than the perfect productivity. Therefore, MN productivity denotes the surplus capacity which emerges under monopolistic rivalry.

           It is to be noted that the concept of surplus capacity denotes only to the long run. This is for the reason that the short run under any type of market structure including perfect rivalry there can be all sorts of departures from the perfect reflecting incomplete adjustment to the subsisting market conditions.

Price Productivity Symmetry under Monopolistic Rivalry

Price is greater than MC under Monopolistic Rivalry

            An important difference between the two associates to the association among price and marginal cost. Whilst at symmetry under perfect rivalry, price parities to marginal cost, at symmetry under monopolistic rivalry price is greater than marginal cost.

           As under perfect rivalry an individual industry cannot over power the price of its commodity and considers price as predefined and invariable, the demand or average revenue curve in front of a horizontal straight line and marginal revenue MR parities to average revenue AR or rate.

          Thus, under perfect competition when an industry equates marginal cost with marginal revenue so as to optimise its profits, the earlier also becomes equal to price. Alternatively, under monopolistic rivalry, an industry exercises some power over the price of its commodity and the demand curve for it, denoting prices at several volumes, inclines downward.

              Consequently, marginal revenue MR curve lies below average revenue AR curve. Thus, in order to optimise profits when an industry under monopolistic rivalry parities marginal cost with marginal revenue, price stands at a higher level than marginal cost. This is presented in the above diagram where at symmetry, price determined parities to OR or V1T which is greater than marginal cost V1E. It is to be noted that manufacturing level of productivity much less than at which marginal cost parities entails a loss in social welfare. It is to be noted that social welfare is optimum when productivity is enlarged to the point where price equals long run marginal cost.

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