Compare and contrast perfect competition and monopolistic competition?

Answer 1

This is a rather common question within the Market Structure topic in Economics. In Market Structure, the Perfect Competition (PC) and the monopoly are considered extreme market structures, while other market structures also exist, like the oligolpoly and the monopolistic competition(MC). Before understanding the differences of these 2 market structure. It's important to realize that the PC market structure consists of many firms or sellers in an area or industry. The monopoly on the other hand, consists of a single seller. A good example, would be someone selling things on an island. The differences between the PC and the monopoly market structure are (1) Ease of entry and exit for firms (2) Type of product sold (3) Type of firm (4) Profit in short run and long run. First of all, is (1) ease of entry and exit for firms. For the PC market structure, new firms can easily enter the market structure, as there are no barriers of entry. This means that new firms who knows that there is a profit to be made in some area, location or industry can easily set up a new shop there. For the monopoly, there is substantial or high barriers of entry preventing new firms from entering the market structure. These barriers of entry are created by existing or dominant firms in a monopoly to prevent new firms or competitiors to enter the market structure. The second difference is (2) the type of product sold. For a PC market structure, the product sold is similar. This means that what one seller is selling, is what another seller is selling. Hence products in the PC market structure are perfect substitutes. We also assume that in PC market structure, the consumers have perfect knowledge of the product. This means that the consumers are aware of the price sold in another shop. For the monopoly, the product sold are not perfect substitutes, and can be rather unique. The third difference is the (3) type of firm. Since the PC market structure faces the above 2 characteristics, this means that the firm in this market structure are powerless to influence the price. This means they have no control to increase the price of the product. This is because if they increase the price of the product, and there are perfect competition, firms who increase the price, will lose out to other firms. Hence firms in PC market structure are considered to be Price Takers. Firms in monopoly market structure on the other hand, are Price Makers. This means that they can influence the price of their product sold to consumers. The monopoly is able to do that, as the monopolist is the single seller in a market. The last difference is the (4) existence of profit. For the PC firm, there is a possibility to earn abnormal profit in the short run, but not possible in the long run. This is because, in a PC market structure, when existing firms earn profit, new firms will enter the market structure, shrinking the profit. For the monopoly, there is a possibility to earn abnormal profit in short run and long run, as there is the existence of barriers of entry to prevent new firms to enter the market. Hope this helps. ( although I may have listed the differences here, they are not the only ones, there are others as well, but the rest can be complicated and might need the use of graphs ). (cheong@bgymail.gd.cn)

Answer 2

first we need to find what is monopoly and what is perfect competition.

Monopoly is the market structure that have only one seller, and only sell the unique products. And Monopoly also have very high barriers entry and its impossible to entry.

Otherwise, Perfect competition is the market structure that have many small firms, and only sell the homogeneous products. Perfect competition also have a very low barriers entry, so its very easy to entry.

The comparison:

- Monopoly more inefficient than Perfect competition because the resources are under allocated to the production of its product

- The demand curve for a perfectly competitive firm is perfectly elastic and the demand curve for a monopoly firm is The market demand, which is negatively-sloped according to the law of demand

- The monopoly firm charges a higher price and produces less output than would be achieved with a perfectly competitive market

- While an economic profit is NOT guaranteed for any firm, a monopoly is more likely to receive economic profit than a perfectly competitive firm.

- The positively-sloped marginal cost curve for each perfectly competitive firm is its supply curve.

Answer 3

Perfect Competition

Number of firms: Many

Barriers to entry: None/non-existent

Pricing: Price = Marginal Cost

Monopolistic Competition

Number of firms: Few

Barriers to entry: None/few

Pricing: Marginal Revenue = Marginal Cost, Mark-Up to Demand Function (monopoly pricing; product differentiation)

Answer 4

In perfect competition there are no restrictions about new entry or withdraw of existing firm in the market. But in monopolistic competition there are restriction on the new coming and withdrawing company, that mean no firm can enter or exist from the market in monopolistic competition.

Answer 5

that products are not standardized in monopolistic competition unlike in perfect competition.

the degree by which the market demand curves slope downwards.

the number of sellers in the markets.

the barriers to entry in the two markets.

Answer 6

Perfect competition exists when there are many players in the market and no seller has a greater advantage that he has all the market to himself. Monopolistic competition has the market skewed to favor one person who takes up most or all of the market share.