Chapter 13, Problem 1DQ

To determine

The difference between monopolistic competition and pure competition.

Explanation of Solution

Monopolistic competition and pure competition are different types of market structures. Pure competition is known as the perfect competition, whereas the monopolistic competition is the imperfect competition. The differences in the characteristics of these two structures are as follows:

Monopolistic competition has a large number of buyers and sellers, whereas the pure competition has a much larger base of the buyers and sellers in the market. The monopolistic competition market is thus much smaller than the pure competition.

The monopolistic competition has differentiated products, whereas the pure competition has homogeneous products. Thus, there exists product differentiation in the monopolistic competition. The control over the market price is another area of concern; there is no control over the price in the pure competition. But under the monopolistic competition, there is little control over the market prices.

There is no non-price competition in the pure competition whereas there is non-price competition in the monopolistic competition which ranges from the advertisement, branding, and so on. There is complete freedom of entry and exit in the pure competition whereas there is only easy entry and exit in the monopolistic competition. These are the main differences between the monopolistic competition and pure competition.

The pure monopoly and the monopolistic competition differ in many aspects of their characteristics. They can be summarized as follows:

There are a large number of sellers in the monopolistic competition compared to the single seller in the pure monopoly. There are differentiated products in the monopolistic competition, whereas there is only a single product in the pure monopoly. Similarly, the pure monopoly has complete market control compared to the limited, little control in the monopolistic competition. There are severe barriers which prevent the entry of new firms into the pure monopoly market, whereas there is easy entry and exit in the monopolistic competition. These are the main differences between the monopolistic competition and pure monopoly.

The product differentiation means that there will be different types of products in the market. The differences can be in terms of the color, quality, quantity, shape, size, as well as the branding of the product. They help to attract the consumers to their brand and increase the demand for their commodities. Even though the differentiated products can be used for the same purpose, they will create a differentiation as well as brand preference in the consumers. Thus, the extent of the product differentiation will exist in the mind of the consumer.

The entry of new firms into the market takes place when there is economic profit present in the market. This economic profit attracts new players into the market. As a result of the new players, there will be more products and this will reduce the demand for the existing firms. Thus, their demand curve will shift leftwards, which shows the decline in the demand for its products and as a result, their economic profit.

Economics Concept Introduction

Concept introduction:

Monopolistic competition: Monopolistic competition is an imperfect market structure which has a relatively large number of buyers and sellers in the market, differentiated products, some control over the market price and a few barriers of entry and exit.

Pure competition: It is a market structure with a broad range of buyers and sellers which is really large, has homogeneous products, freedom of entry and exit, normal profit and no control over the market price.

Pure monopoly: Pure monopoly is an imperfect market structure where there is only a single seller. He controls the market prices and there is no entry into the market.