Question

What firms in perfect competitive market and monopolistic competitive market have in common? How they are different in the long run? Explain using appropriate graphs.

Answer 1

Perfectly competitive firm and monopolistic firm have in common that they have zero economic profit in the long run and they have free entry and exit in the industry.

But, these two types of firm has differences as well. Perfectly competitive firm works to produce to achieve productive and allocative efficiency. But, monopolistic firm creates inefficiency in the market in the long run and they produce differentiated products, whereas perfectly competitive firm has homogeneous products.

As per the above graph, it can be observed that both types of firms are making zero economic profit in the long run as a common feature. But, perfectly competitive firm is producing at a level, when price = MC = LRATC. It means that productive and allocative efficiency is achieved. In contrast to it, monopolistic firm is not producing at the lowest level of LRATC or at P=MC level. It means that monopolistic firm is inefficient even in the long run. It is the difference between both types of firms.