EXCESS CAPACITY UNDER IMPERFECT COMPETITION

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EXCESS CAPACITY UNDER IMPERFECT COMPETITION 

`Discussion of monopolistic competition by Chamberlin and Joan Robinson have shown that firms under imperfect competition operate with excess capacity. Acc~ing to these economists. a finn under monopolistic competition or imperfect competition produces on output in the long-run equilibrium. which is less than socially optimum or ideal output. In other words, they do I0t Produce that level of output at which long-run average cost is minimum. This will happen when the firms operate at a point on the falling portion of the long-run average cost curve. A linn under monopolistic competition attains long-run equilibrium when the demand curve (or average revenue curve) facing it is tangential to the long-run average cost curve so that it may earn only normal profits. Since they are operating on the falling portion of the long-run average cost curve, the firms can reduce their average cost, (and hence price) by expanding their output to the minimum point of the I ng-run average cost curve. But they do not increase their output, because their profits have already been maximized at the level of output smaller than a inch their long-run average cost would be minimum. This happens at a point where equality between marginal revenue and marginal cost has been attained. It is clear that productive resources of the COMmunity arc fully utilized only when they are used to produce that level of output which brings down the long-run average cost to the lowest point. But the monopolistic firms produce less than that level of out put which is socially optimum lOr Ideal outlet UL ‘PlI’ quite different from what helping under perfect of I petition when the firms of long-run average Ul’1 curve. Thus. the actual hln run output of the Iinn under monop  completion falls short of what I~produced under perfect Will petition which can be considered the socially ulcal output. This gives the measure of excess capacity luch lies unutilized under imperfect competition. The two figures  the long~run pov ruou of a perfectly competitive linn. The firm is in long-run equilibrium at the level 01 00i output where the lung-run average CO\t is minuuum At this point. Ihu the double condition run aquilinum I suu-ficd. This represents the socially ideal output.  The operation of the firm under monopolistic competition is shown in the figure 29.9. In this case, the long -run equilibrium is achieved at OM output at whieh the marginal revenue is equal to marginal cost and price is equal to average cost. Here imagevenue curve AR is tangential to average cost curve AC at point f corresponding to output OM. It can he seen that at output OM average cost is falling and It continues to fall upto ON and thus reduce it~ long run average cost to the minimum. lICence. the ideal output is ON where the long-run average  IS minimum This means that this firm is producing ~I, quantity) less than the local output. Hence MN  represents excess capacity which emerges under  listie competition. It may be noted that this concept of pacity refers only to the long-run, because in the

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EXCESS CAPACITY UNDER IMPERFECT COMPETITION