Chapter 17, Problem 1FT

Subpart (a):

To determine

How monopolistic competition likes a monopoly and a competition.

Explanation of Solution

The market is a structure where there are buyers and sellers who sell and the exchange of goods and services between the buyers and sellers exchanges goods and services. The price is determined by the interaction of the demand and supply in the market.  But in the market structure where there is only one seller selling the commodity which does not have any close substitutes is known as the monopoly market structure. Under the monopoly structure there will be many barriers to the entry into the market.

The Monopoly is a market structure where there is only one seller selling the unique product and the seller faces the downward sloping demand curve. The competitive market is a structure where there are many sellers selling the identical goods in the market and thus the demand curve is a horizontal straight line.

When the case of the monopolistic competition is considered, there are many sellers in the market which makes competition and the feature just like the perfect competition. When the features of monopoly are concerned, the monopolistic competition features that even though there are some sellers, each one will be selling differentiated products in the market and thus would be facing the downward sloping demand curve in the market. Thus in these senses, the monopolistic competition depicts the features of the both monopoly and perfect competition in it.

Economics Concept Introduction

Concept introduction:

Market: The market is a structure where there are buyers and sellers who sell and the exchange of goods and services between the buyers and sellers exchanges goods and services.

Monopolistic competition: The monopolistic competition is the market structure where there are many sellers selling differentiated commodities and there are few barriers to entry.

Monopoly: The Monopoly is a market structure where there is only one seller selling the commodity. There will be very strong barriers to entry into the market.

Subpart (b):

To determine

How monopolistic competition likes a monopoly and a competition.

Explanation of Solution

The demand curve of the monopolist is downward sloping and thus, under the monopoly market structure, the monopolist charges a price which is higher than the marginal cost of producing the commodity. Similarly, in the case of the monopolistic competition, the seller faces the downward sloping demand curve and thus, the monopolistically competitive firm also charges a price which is higher than the marginal cost of producing the commodity which is a direct outcome of the monopoly like feature in the monopolistically competitive firm.

In the perfect competition, the firm earns normal or the zero economic profit in the long run because, the profit would attract more entrants into the market which will increase the supply and reduce the price to the normal level. So, just like this feature of the perfect competition, the monopolistically competitive firm also earns zero economic profit in the long run because there are only a few barriers to entry into the market and the profit attracts more players into the monopolistically competitive market which brings down the prices to equilibrium and profits towards zero.

Economics Concept Introduction

Concept introduction:

Market: The market is a structure where there are buyers and sellers who sell and the exchange of goods and services between the buyers and sellers exchanges goods and services.

Monopolistic competition: The monopolistic competition is the market structure where there are many sellers selling differentiated commodities and there are few barriers to entry.

Monopoly: The Monopoly is a market structure where there is only one seller selling the commodity. There will be very strong barriers to entry into the market.