Question

Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive and explain your answers.

Wooden no. 2 pencils

Copper

Local electricity service

Peanut butter

lipstick

Answer 1

1. Wooden no 2 pencils-. They have perfectly competitive market because there are large number of producers and manufacturers who can produce and sell pencils which are identical/homogeneous. As each producer forms a small proportion in the total market, and they are price takers.
2. Copper- Copper also has perfectly competitive market, because there are a large number of producers and manufacturers producing and selling identical/homogeneous copper. As each producer forms a small proportion in the total market, and they are price takers.
3. Local electricity service- Local electricity service has a monopolistic market, this is because it is a natural monopoly. There is low-cost and low price for one firm to provide all the output. Natural monopoly emerges when the largest suppliers of the service, most importantly the first supplier in the market has a cost advantage over the other competitors whereby it is most beneficial to produce and manufacture the service by the single largest firm. This limits and restricts the entry of other firms to the market, and hence it is a monopoly.
4. Peanut butter- Peanut butter has a monopolistically competitive market. This is because of different brand names that exist with different quality and characteristics. Since there are lot of brands of butter available in the market with slight extent of differentiated product, consumers are more captivated by even a very small or slight change in the quality, characteristics, taste and appearance of the product. So producers and manufacturers produce slight differences or variations in the product and enter into the market with new brand name that attracts the customers.
5. Lipstick- This also has a monopolistically competitive because lipstick from different firms and companies differs slightly. There are a lot of firms who enter or exit without any limit or any restriction. There are many sellers who sell various and different varieties of lipstick to attract the women consumers. There is an extent and degree of differentiation in the product which makes lipstick market without any perfect substitution.