Question

Consider the monopolistically competitive market structure, which has some features of a perfectly competitive market and some features of a monopoly. Complete the following table by indicating whether each attribute characterizes a perfectly competitive market, a monopolistically competitive market, both, or neither. Check all that apply. Attributes Perfectly Competitive Market Monopolistically Competitive Market Many sellers Easy entry Few sellers Price equals average total cost in the long run

Answer 1

Attribute- Many sellers

answer- both. Perfectly competitive market and monopolistically competitive market.

A perfectly competitive market is a market structure in which there are a large number of sellers , each seller producing a homogeneous product.

A monopolistically competitive market is a market structure in which there a large number of sellers of a particular product, with each seller selling somewhat differentiated but close substitute to the product sold by other sellers.

Hence, both perfectly competitive market and monopolistically competitive market have large number of sellers.

Attribute- Easy entry

Answer- both. Perfectly competitive market and monopolistically competitive market.

Both perfectly competitive market and monopolistically competitive market structure are characterised by free entry and exit i.e.,firms can enter and exit the industry as per their desire. Hence, both the markets have easy entry.

Attribute- Few sellers.

Answer- neither.

​​​​Perfectly competitive market and monopolistically competitive market have large number of sellers. Both the markets do not characterise few sellers. Both the markets have large number of sellers of a product.

Attribute- Price equals average total cost on the long run

Answer- both. Perfectly competitive market and monopolistically competitive market.

Perfectly competitive market and monopolistically competitive market are characterised by free entry and exit. This feature of free entry and exit ensures that all the firms earn normal Profits only i.e. ,price equals average total cost ( just covering their costs) in the long run.

In perfectly competitive market, if the existing firms are earning economic profits, then new firms will be attracted to enter the industry to earn these economic profits. As new firms will enter, the Supply curve of the industry will increase and supply curve will shift to the right. This rightward shift of the Supply curve with an unchanged demand curve will cause the equilibrium price to fall. As price will fall, profits will also fall. This process of entry continues until increased supply has reduced the price to such a level so that all firms earn normal Profits only ( price= average total cost) in the long run. If existing firms are incurring losses, then few firms will exit the industry in the long run. As firms will exit, the supply of the industry will decrease and Supply curve will shift to the left. This leftward shift of the Supply curve with an unchanged demand curve will cause the equilibrium price to rise. As price will rise, losses will be eliminated. This process of exit of firms will continue to take place until reduced supply has increased the price to such a level that all the losses are eliminated and all the firms earn normal Profits only ( price equals average total cost) in the long run.

In monopolistically competitive market, if existing firms are earning economic profits, then new firms will get attracted to enter the industry. As new firms will enter, the demand for individual firms will decrease. As such the demand curve will shift to the left. This process of entry of new firms will continue to take place until demand curve becomes tangent to average total cost curve indicating that price equals average total cost and all the firms earn normal Profits only i.e., just covering their costs in the long run. If existing firms are incurring losses, then few firms will exit the industry in the long run. As firms will exit, the demand for individual firm will increase and demand curve will shift to the right. This exit of firms will continue to take place until demand curve becomes tangent to average total cost curve indicating that price equals average total cost. When demand curve will become tangent to average total cost curve, all losses will be eliminated and all the firms will earn normal Profits only i.e. just covering their costs.