Excess capacity is the difference between the optimum output that can be produced and the actual output produced by the firm.

Expenditure involved in selling the product is selling cost. (eg) advertisement. Selling cost changes the position of the demand curve.

Market refers to a system of exchange between the buyers and the sellers of a commodity.

(i) In duopoly there are only two sellers.
(ii) Each seller is fully aware of his rival's motive and actions.
(iii) Both sellers may collude.
(iv) They may enter into cut-throat competition.
(v) There is no product differentiation.
(vi) They fix the price to get maximum profit.

Perfect Competition	Monopolistic competition
1. The cost curve is 'U' shaped	1. The cost curve is 'U' shaped
2. There are large number of sellers	2. There are many sellers
3. There are large number of buyers	3. There are large number of buyers.
4. There is free entry & exit of firms	4. There is free entry & exit of firms.
5. There is abnormal profit or loss in the short run.	5. There is abnormal profit or loss in the short run.
6. There is normal profit in the long run.	6. There is normal profit in the long run.

In perfect competition there is freedom for new firms to enter into the industry but in monopoly no competitor can enter the market except for the monopolist.

Introduction:
E.H. Chamberlin introduced the concept of monopolistic competition.
(i) Firm under monopolistic competition has equilibrium when MC = MR & when MC cuts MR from below.
(ii) The AR curve slopes downward and is fairly elastic.
(iii) Different firms produce different varieties of the product and sell them at different prices.
Each firm seeks to get equilibrium with regard to
1) price & output 2) product adjustment 3) selling cost adjustment
Short run equilibrium

In fig (a) OM is the equilibrium output. OP is the price.
TR = OMQP, TC = OMRS, Abnormal Profit = PQRS
In fig (b) TR = OMQP, TC = OMLR, Loss = PQLR
Long run equilibrium:

(i) In short run the firm may earn super normal profit or incur loss.
(ii) In the long run the AR is more elastic.
(iii) The firms earn only normal profit.
(iv) Equilibrium output = OM. Price = OP, AR = QM, AC = QM.
(v) Equilibrium is got when AR = AC. AR is tangent to AC at Q.

Large number of buyers and sellers:
(i) Since there are large number of buyers and sellers each individual buyer or seller buys or sells a very very small quantity of the product found in the market.
(ii) So he has no power to fix the price of the product.
(iii) He is only a price taker.
Homogenous product & uniform price:
(i) All the units of the product are perfectly substitutable - they are of the same size, shape, colour, quality.
(ii) So a uniform price prevails in the market.
Free entry and exit:
(i) In the short run, the very efficient producer can produce the product at a very low cost & earn super normal profit.
(ii) This attracts new firms to enter.
(iii) When there are more firms, supply increases, so price falls.
(iv) Inefficient producer faces loss & so quits the market.
Absence of transport cost:
The prevalence of the uniform price is also due to the absence of the transport cost.
Perfect knowledge of the market:
(i) All buyers and sellers have a thorough knowledge of the quality of the product, prevailing price.
No government intervention:
(i) No government regulation on supply of raw materials & in price determination.