Chapter 15, Problem 6P

To determine

Concept Introduction:

Monopolistic competition: There are less degree of competition in such markets Examples:detergents, textiles, automobiles, shop, drawings and TV. The features of monopolistic competition are:

• Large number of buyers and sellers: In the monopolistic competition market there are a large number of sellers and buyers.
• Product differentiation: This is one of the most important features of monopolistic competition. The product of the sellers is differentiated but are close substitutes of one another. It can be real or artificial. The demand curve monopolistic firms face is an elastic demand curve.
• Free Entry or Exit: There are no barriers to entry or exit, firms can easily enter or exit the market.

Perfect Competition: It is a market structure in which there are almost no rivals in the market. In this type of market structure, neither the seller nor the buyer can influence the market pricing which means both are price takers. The characteristics of perfect competition are:

• Large number of buyers and sellers: Due to this property buyers as well as sellers are price takers.
• Homogeneous Product: It implies that in perfect competition, market goods are perfect substitutes for each other.
• Free entry or exit of firms: In perfect competition market, everyone has the liberty to enter or exit the market, there is no barriers to entry or exit. Due to this the firm earns a normal profit in the long run.

• In the long run, both perfect competition and monopolistic competition have a zero-economic profit, however, both markets are not equal in terms of efficiency.

• The price which is charged in monopolistic competition is greater than that of perfect competition.

• The total output sold in perfect competition market is more than the total output sold in monopolistic market structure.

• Monopolistic competition firms have excess capacity as they do not minimize the total average cost.