Question

Compare the elasticity of a monopolistic competitor’s demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare the prices and outputs that would result in the long run under pure competition and under monopolistic competition. Contrast the two market structures in terms of productive and allocative efficiency. Explain: “Monopolistically competitive industries are populated by too many firms, each of which produces too little.”

Answer 1

A perfectly competitive market is a price taker. The demand curve is horizontal and therefore, it's elasticity is perfectly elastic.

In a monopolist firm, the demand curve is downward sloping. A monopolist firm works in an elastic demand curve.

The demand curve of a monopolistic competition is also downward sloping.

The productive and all locative efficiency occurs the most in perfectly competitive market. Here, the cost of the good is equal to the marginal cost of the good, implying the maximum consumer surplus happens. All the goods are identical. Therefore, consumers could but from any firm. However, for the firms, they have a break even profit.

In case of monopoly firm, the firm has products that are not allocated efficiently. Therefore , the consumer surplus is not maximised here. Moreover, there is only one type of good that is available, therefore, the consumer surplus is not maximised.

In case of monopolistic competition, product differentiated goods are available. Therefore, the consumer surplus here is a little more than that of the monopoly firms. The products are efficiently allocated here relative to monopoly firms.

In monopolistic competition, there are too many firms because products are differentiated here. Due to the presence of too many firms, each firm produced too little.