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.

(i) A monopoly is a one firm industry.
(ii) It has a downward sloping demand or AR curve.
(iii) More units of output are sold at less price.
(iv) MR lies below AR.
(v) The monopolist will continue to sell his product as MR > MC. Equilibrium is when MC = MR.
(vi) Beyond this point the producer has loss.

At OM output MC = MR. Beyond OM he will stop production since MC > MR.
At equilibrium average revenue = QM
Average cost = RM
Profit per unit = RQ
Total profit = PQRS

Introduction:
Few firms selling homogeneous or differentiated product is oligopoly. (eg) car, cigarette.
(i) Few large firms: Very few big firms own the major control of the whole market by producing major portion of the market demand.
(ii) Interdependence among firms: The price & quality decisions of a particular firm are dependent on the price & quality decisions of the rival firms.
(iii) Group behaviour: The firms realise the importance of mutual co-operation.
(iv) Advertisement cost: The oligopolist raises sales by advertising or improving the quality of the product.
(v) Nature of Product: Products may be differentiated or homogeneous.
(vi) Price rigidity: Prices are difficult to be changed. The oligopolistic firms do not change their prices due to the fear of rival's reaction.

Short run equilibrium:

In diagram (a) the demand and supply of all firms interact and price OP is fixed.
(i) In diagram (b) the AC is less than the price.
(ii) At equilibrium MC = MR, AR = QM, AC = RM. Profit per unit is RQ
(iii) Total profit is PQRS.
(iv) In diagram (c) AC is greater than AR.
(v) At equilibrium AR = QM, AC = RM, loss per unit is RQ.
(vi) Total loss is PQRS.
(vii) When there is abnormal profit, new firms will enter the industry
(viii) Supply increases, price falls, profits become normal.
Long run equilibrium:

(i) All factors are variable. Firms earn normal profit.
(ii) There is no tendency for new firms to enter or leave the industry.
(iii) Equilibrium is at minimum point of LAC.
(iv) At point E, LMC = MR = AR = LAC.
(v) AC = QM, AR = QM.
(vi) Profit is normal.
(vii) Long run equilibrium price is lower than short run equilibrium price.
(viii) Long run equilibrium quantity is larger than short run equilibrium quantity.

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.