Question

Compare and contrast monopolistically competitive firms with competitive firms. Be sure to explain what is similar in each industry and what is different. Make sure to address how many firms are in the industry, whether the product is homogenous or differentiated, conditions of entry and exit, and both short-run and long-run economic profit. (pls explain more as I'm only in intro to Micro, thx)

Answer 1

Ans) Perfectly competitive market ÷ Perfectly competitive market is where there are many sellers selling homogeneous products. There is no barrier to entry and exit.

Since neither the buyer nor the seller is large enough to influence the market, both are price takers. That is, sellers have no market power and price is decided by forces of demand and supply.

In Perfectly competitive market, price is also equal to marginal revenue (MR) and profit maximising firm produces the quantity where MR and MC curve intersect. Further, no matter how much quantity the firm produces, it will always get the same price for its product.

In short run, firms can earn positive or negative economic profit but in long run they will always earn zero economic profit. Firms will earn positive economic profit when price is above ATC. Firms will earn zero economic profit when price is equal to minimum of ATC. Firms will earn negative economic profit when price is below ATC.

Monopolistic market ÷ Monopolistic market is where there are many sellers selling homogeneous but differentiated products. Due to this differentiated products, firms have some market power. That is, they can charge above their marginal cost.

Further, in monopolistic market also, firms may earn positive or negative economic profit in short run but in long run they will earn zero economic profit.

Monopolistic firm produces the quantity where MR and MC curve intersect and then charges the price on demand curve.

Perfect competition	Monopolistic competition
Many sellers	Many sellers
Identical products	Differentiated products
No barrier to entry and exit	Low barrier to entry and exit
No market power	Some market power
Economic profit in short run	Economic profit in short run
Zero economic profit in long run	Zero economic profit in long run
Eg- vegetable market	Eg- restaurants, fashion industry