Question

What is the main characteristic of a monopolistically competitive market different from a perfectly competitive market? Discuss the important implications of this difference for a monopolistically competitive firm’s demand (i.e., in regards to its price elasticity or price-cost margin, and the number of consumers), and for its short-run and long-run profits.?

Answer 1

Answer:-

Characteristics	Perfect competition	Monopolistic competition
1.Size of market	Large	Small
2.Product	homogeneous	differentiated
3.Price policy	Price takers	Price makers
4.Market knowledge	complete information	Incomplete information
5.Price elasticity of demand	Perfectly elastic (indefinite)	Highly elastic
6.AR MR curves	Equal	Different
7.Selling cost	Nil	Large
8.Equilibrium conditions	MR =MC MC cuts MR from below	MR =MC MC cuts MR from below

In monopolistic competition markets, there is product differenciation .Monopolistic competitive market is characterized by large numbers of sellers and buyers,so demand and supply conditions are dependent on each other.Buyers are ready to pay higher when they get improved quality products. As the firm has the knowledge about the demand and cost of its products, Firm is able to manage and estimate the quality and quantity of its production cost and revenue.In monopolistic competition, all firms have identical demand and cost conditions.

Demand curve of the monopolistic competitive market,with difference that is comparatively more elastic is corresponds to that for the industry as a whole. Demand curve of the monopolistic competitive market is downward sloping and not parallel to x-axis.

▪︎In short run, a monopolistic competitive firm can earn normal profits, super normal profits or losses.The firm can earn abnormal profits also ,if its product demand is strong. In long run,no fixed costs are there.If the demand is strong so as to firm can earn abnormal profits. When firms making losses,they leave the market and the absolute market shares of the remaining other firms increases. Demand curve shifts upwards and rightwards. In long run, firms earns normal profits.

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