EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

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EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

§  DEFINATION OF WASTE.

§  EXAMPLE OF WASTE.

§  ACCORDING TO DIFFERENT PROFFSSORS.

§  CAUSES.

§  REASONS.

§  DIAGRAMS.

§  ANALYSIS.

DEFINATION OF WASTE

                                    “Waste means whatever extra quantity which is left over and unutilized by producer.”

EXAMPLE OF WASTE

                           Molasses left over after sugarcane is used.

                           Food left over after marriage function is over.

ACCORDING TO DIFFERENT PROFESSORS

1)      PROFESSOR MEADE

                                    “The term ‘waste’ refers to waste of monopolistic & not prefect competition. Because in perfect competition hardly any waste takes place”.

2)      PROFESSOR ROTHSCHILD

There are 7 kinds of waste in Monopolistic market

                                                                               I.      Expense on competitive advertisement.

                                                                            II.      Expense on cross transport.

                                                                         III.      Failure in specialization.

                                                                         IV.      Excess capacity.

                                                                            V.      Existence of inefficient forms.

                                                                         VI.      Higher price & less output.

                                                                      VII.      Unemployment.

CAUSES

1)       As demand curve is perfectly inelastic and average cost is decreasing, there is less use of resources.

2)      Present Firms who is get maximum short run profit, has to divide its profit with new entrance of firms. Thus, in long run, each firm will have to make less production, which leaders to excess capacity of production

EXM: T.V, clothes, etc…

REASONS FOR EXCESS CAPICITY

1)      In the perfect competition: under this competition, MC&AC are equal at equilibrium in long run. So, AC is at minimum. Therefore, resources are used at optimum manner.

2)      In Monopolistic Competition: there is AC more than AC at equilibrium in long-run. This means firm earns minimum Ac after equilibrium takes place. As a result, excess capacity takes place.

ANALYSIS

Ø  X-axis indicates output in units

Y-axis indicates revenue & cost.

Ø  In monopolistic competition, equilibrium takes place between OM and at equilibrium point.

Ø  MC cuts AR at B & cuts MR at E.

Ø  If a vertical line in drawn at E, then at firm earns MC equal to MR.

Ø  Hear, AR is equal to price curve but AC is higher than MC.

Ø  Here, AC of firm is Minimum at B point. Because at here AC interests MC& AC is minimum.

Ø  In perfect competition, AR & MR are equal, so no wastage is possible. But in monopolistic, firm get equilibrium at normal Profit, but MN capacity is still remain unutilized.

Ø  As factors production remains fully unutilized, at equilibrium point, full employment or max output cannot be achieved. Here, capacities of production remains excess & so products can be made at higher cost & there prices are kept quite high. Thus, wastage is created.

Ø  Prof. Hicks & Robertson believe that it is not a social waste because different classes of peoples get variety of products due to this. If there is excess capacity of production, in times of accidental rise in demand, supply of production can be increased without increasing proportion of fixed factors.

Ø  Here; at point A, cost is higher and profit is higher. But maximum utilization is not possible. So, it is not proper place for production for firm to produce goods at minimum cost & to earn maximum profit.

Ø  And at point B, Profit is not maximum and AC is at minimum, while resources are used at maximum. But if firm doesn’t get profit, how can a firm continue business or bear loss? So, its not proper point of production.

So, as per this, we can say:

                        “Excess capacity & wastage is seen in monopolistic competition.