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

Monopolist competition is a type of imperfect competition such that many producers sell products that are differences from one another as goods but not perfect substitute in monopolist competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firm. Monopolistic competition is different from a monopoly.A monopoly exists when a person or entity is the exclusive supplier of a good or service in a market. The demand is inelastic and the market is inefficient. (I) have products that are highly differentiated, meaning that there is a perception that the good are different for reasons other than price. Have many firms providing the good or service. Firms can freely enter and exists in the long run. Firm can make decisions independently.there is some degree of market power, meaning producers have some control over price. And buyers and seller have imperfecti information.product differentiation is the process of distinguishing a product or service from others to make it more attractive to a target market. The demand curve in a monopolistic competitive market slopes downward which has several important implications for firms in this market.the downward slop of a monopolistically competitive demand curve signifies that the firm in this industry have market power. Market power allows firms to increase their prices without losing all of their customers.the downward slop of demand curve contribute to the inefficiency of the market, leading to a loss in consumer surplus, deadweight loss, and excess production capacity.short run outcomes of monopolistic competition can lead to significant profits in short run, but are inefficient.short run is the time period when one factor of production is fixed in terms of costs, while the other elements of production are variable. Price determination under monopolistic competition the equilibrium of the firm under monopolist competition follows the usual analysis in the short run and long run. That the number of sellers is large and they act independent of each other. Product is different from the other products.demand curve which is elastic. No new firms enter the industry.that the short run cost curve of each firm differ from each other short run marginal cost curve SMC cuts MR curve.long run equilibrium adjustment process may take place in two ways with in the industry or group itself with open entry. Every firm equates it's my to its marginal revenue. The demand curve is elastic every firm adjusted it's output according cost condition. If firms in the monopolist competitive industry are earning super normal profit. New firm will be attracted into the group with the entry of new forms the existing market divided among more seller so that each firm will sell lesser quantity.price under perfect competition there are two parties which bargain in market the buyers and the seller it is only when they agree a commodity can be bought and sold at a certain price. This product pricing is influenced both by buyers and sellers that isn't demand and supply. Price is determined at a point where these two forces are equal, and that is known as the equilibrium price. Quantity demanded and supplied at this is called the equilibrium quantity. When price is less or more than the equilibrium quantity. The principal difference between these two is that in case of perfect competition in the firms are price takers, where in monopolistic competition the firms are price makers.perfect Comipition is not realistic, it is a hypothetical situation on other hand, monopolistic competition is a practical senerio.