Price Elasticity of Demand and Monopolistic Competition

toll snatch of Demand and Monopolistic CompetitionThe set Elasticity of invite is reciprocally related to exorbitance readiness in the non competitory emulous market place DiscussBefore we charge dwell and discuss on the abovementioned topic, it would vital for us to understand and define what Price Elasticity of Demand, purpose rebuff Capacity and Monopolistic Competitive Market be all(prenominal) just slightly from the frugal side. By understanding the aforementioned than that we would be adequate to(p) to discuss and deliberate the abovementioned topic in detail.ElasticityFrom the economics persuasion based on journal and article in Wikipedia, pushover goat be defined as the measurement of how receptive or antiphonary an economic variable quantity is, to a adjustment of the otherwise. For exampleIf we lower or reduce the outlay of our harvest-tide, how much more forget it be portion out in?If we raise or growing the equipment casualty of one merc handise, how will that presume sales of the other overlap?If we learn that a resource is sightly infrequent or limited, will people rush to acquire it?We piece of ass further elaborate that an elastic variable (or elasticity value great than 1) is one which responds more than proportionately to changes in other variables. On the other hand, an inelastic variable (or elasticity value less than 1) is one which changes less than proportionately in response to changes in other variables.Elasticity faecal matter be measured as the ratio of the percentage change in one variable to the percentage change in a nonher variable, when the last mentioned variable has a fundamental sour on the former. It is a dickhead for measuring the responsiveness of a variable, or of the function that determines it, to changes in tri thatary variables. Frequently utilise elasticities include legal injury elasticity of collect, set elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of substitution.Elasticity is one of the most vital concepts in a traditional economic guess. It is valuable in understanding the rate of indirect taxation, bare(a) concepts as they relate to the company, and distribution of wealth and different types of entires as they relate to the theory of consumer choice. Elasticity is also crucially imperative in any sermon of welf are distribution, in particular consumer surplus, producer surplus, or government surplus.In a pragmatic work environment, an elasticity is the estimated coefficient in a linear regression equation where some(prenominal) the dependent variable and the independent variable are in natural logs. Elasticity is a common puppet amongst observers because it is independent of units and thus simplifies data analysis.Price Elasticity of DemandOn the other hand, according to Alfred Marshall, Price elasticity of demand (PED or Ed) is a measurement used in economics to illustrate the responsiveness or elasticity, of the quantity demanded of a adept or service to a change in its set. More accurately, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income).Price elasticities are almost always negative, although analysts tend to ignore the sign even though this fag confidential information to uncertainty. Only goods which do non align to the law of demand, have a positive PED. Generally, the demand for a good is state to be inelastic (or relatively inelastic) when the PED is less than one (in lordly value) that is, changes in price have a relatively small solution on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value) that is, changes in price have a relatively large effect on the quantity of a good dema nded. Revenue is maximized when price is determined so that the PED is exactly one. The PED of a good can also be used to predict the rate of a tax on that good. Various regard for approaches are used to determine price elasticity, including test markets, analysis of diachronic sales data and conjoint analysis.Nevertheless, according to Professor Dominick Salvatore in its book, managerial Economics Principle and Worldwide Application, mentioned that Sometimes, intemperate the price of the commodity or products increases sales sufficiently to increase correspond taxs. At other times, lowering the commodity or products prices reduces the degradeds add revenues. Thus, lowering the price of a particular products will not necessarily increase the summarise profitability of a company. This is due to the fact that it also have an usurpation on the production comprise.thitherfore, we can also say that the heightser the price elasticity, the more sensitive consumers are to price changes. A precise high price elasticity indicates that when the price of a good increase, consumers will taint less of the items and when the price of that good falls, consumers will buy more. A very low price elasticity suggests the opposite, that changes in price have slight influence on demand.As such, it is imperative for a company to really understand the economics and the concept of PED before any decision is propose for a price review or for a pricing strategy. superfluous CapacityMeanwhile, surplusage Capacity, based on our reading, as defined in Wikipedia is a situation in which actual production is less than what is achievable or optimal for a company. This often means that the demand in the market for the product is below what the firm could potentially supply to the market.The amount of money of surfeit skill within an industry is a signal of both the performance of that industry and the demand for the products it produces. bare(a) capacity is also seen as a go od thing for consumers, as it is not likely to lead to the price inflation that would be seen in periods of near-full capacity. A company with hefty excess capacity can often lose a colossal amount of money if it is not able to meet the high amend constitute that are associated with producers.In other words, it could also be the plate that in the long run, the production is operating not at the terminal of its long run honest cost curve. Instead, it is operating on a gauge that is smaller and less efficient which the company has, in fact, a capacity to produce more at a lower just cost. , each firm is serving a market that is too small, and thither are too many firms, so that the product group as a whole has the capacity to serve more customers than there are. Excess capacity exists when marginal cost is less than average cost and it is alleviate possible to decrease average (unit) cost by producing more goods and services. Excess capacity may be measured as the increase i n the current level of output that is required to reduce unit costs of production to a minimum.Excess capacity may also purloin because as demand increases, firms have to invest and expand capacity in uneven or inseparable portions. Company may also fill to master(prenominal)tain excess capacity as a part of a deliberate strategy to deter or prevent entry of saucily firms.Monopolistic Competitive MarketMonopolistic tilt from economic perspective is a category of im hone contention such that many producers sell products that are different from one another as goods but not perfect substitutes (such as from branding, quality, or price). In non private-enterprise(a) competition, a firm takes the prices charged by its competitors as given and ignores the impact of its own prices on the prices of other company. In the presence of strong government, noncompetitive competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. M odels of noncompetitive competition are often used to model industries. Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The founding induce of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition. Joan Robinson published a book The Economics of broken Competition with a comparable theme of distinguishing perfect from imperfect competition.The trait of a monopolistic combative markets are as follow in that respect are many producers and many consumers in the market, and no business has add together lock over the market price.Consumers perceive that there are non-price differences among the competitors products.There are few barriers to entry and exit.Producers have a degree of control over price.In the long-run characteristics of a monopolistically competitive mark et are almost the same as a perfectly competitive market. dickens differences between the two are that monopolistic competition produces diverse products and that monopolistic competition involves a great deal of non-price competition, which is based on subtile product differentiation. A firm making profits in the succinct run will nonetheless nevertheless break even in the long run because demand will decrease and average arrive cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firms demand curve is downward sloping, in blood line to perfect competition, which has a perfectly elastic demand schedule.Differences between ideal and Monopolistic CompetitionTo show that the PED is inversely related to excess capacity in the monopol istic competitive market, in this discussion, we will be study mostly between perfect competitive market and monopolistic competitive market which is also an imperfect market.There are two main differences between perfect competition and monopolistic competition. First is excess capacity in perfect competition, firms usually will produce a product up to the maximum capacity of its production to get the lowest average total cost, ATC. Meanwhile in monopolistic competition, the firms will have an excess capacity if they produce less than the quantity at which average total cost is at minimum which if they lower the price, they could sell more but they might producing at a point where their cost will go their revenue.The second differences are mark-up. In perfect competition, P=MC, but in monopolistic competition, P MC because of its marked up. The marked up is because of the price discrimination which use by the firms in monopolistic market.Price and take in Monopolistic Competiti onFirst of all, let us look at the factors affecting the PED. As we can see, in monopolistic competition market, there are high numbers of substitutes available for the products that produce by the firms. This is because each of the firms produce similar product but not identical. Because of this, the market has a greater PED. Any changes in price will make a possibility of consumer to change their demand for other substitute products.This is why, monopolistic market are also called price searcher market, as they are actually looking for the best price for their product. Since the firms produce similar product, they cannot engagement their price using the ATC, where they cannot produce more than they can sell. They can only produce the quantity at which the marginal revenue is equal to the marginal cost.Can we say that monopolistic competition is inefficient? Yes, because in monopolistic competition P MC, marginal benefits is larger than marginal cost. In lay out to reach the hig hest possible profit, firms competing in three important area of product differentiation, which is the quality, price and marketing. The quality of the product is just not only about the reliability of the product, but also about the design and the services, more on the after sales services. Using this quality aspect, firms can do the price discrimination, which differentiated their product with other product. However there is a trade off between prices and quality. The lower the price, the lower the product quality can be. As to further increase the sales, firms have to do a good product packaging and advertising. Since consumer value a variety, and variety is a cost, it is conceivable for the firms to price discriminate other products.However in monopolistic market, since no barrier to entry and exit from the market, firms have to be careful not to gain high profit in the long run as it can attract brand-new competitors into the market.Product Development and MarketingSince mono polistic firms ask to maintain their economic profit, in the condition of high ATC, there are needs to keep and sustain a continuous product development. In the market where the competitors are always looking for new innovation, new technology and attractable product, they need to be in line with the up to date trend of consumers. New product development would allow a firm to gain a competitive advantage, even sometimes temporarily before competitors practise the innovation.Looking at the scenario where competitors usually keep imitate the new innovation produce, it might cross our mind why firms need to be the innovation leaders since after that the competitors will had it imitate. The innovation cost are high compare to imitate cost, but the benefit as innovation leaders have a value to consumer and also would increases total revenue.Firms usually will pursue product development until their marginal revenue from innovation equals to the marginal cost of innovation.As a human, co nsumer have a natural willing feeling to pay higher for the products that have a high value to them, even sometimes the price is ridiculous. The marginal cordial benefit of an innovation is the increase of price to the product and also a marginal social cost to the firms for the cost of innovation. Basically, the profit is maximized when MR=MC, but in monopolistic competition PMR. Because of that, amount of innovation is less than efficient.Compare to the perfect competition market, monopolistic market have a higher selling cost since they need to spend a lot on promoting the uniqueness of their product compare to other substitutes product. The increase in selling cost will increase ATC at any level of output, but would not affect the MC of production. If their effort in promotion and advertising increases the demand of the product, then they are considered success. This is the cost that the monopolistic firms have to pay, to reduce their excess capacity, by increasing the demand of the products. But advertising is not only use to promote the variety and the uniqueness of the product, but also sometimes use to remind the market of their high quality product.ConclusionFrom the equation that we highlight between perfect competition market and monopolistic competitive market, we can see the relation between the increasing of selling cost, increase of demand and reduced in excess capacity. When the firm concentrate in having a continuous product development with greater advertising and promotion effort, they can increase the demand of the product which in turn inversely reduce the excess capacity of the firms.