Question

Explain monopolistic competition. How is it similar to perfect competition? How does it differ from perfect competition?

Answer 1

ANSWER-

Monopolistic Competition - Monopolistic competition is a form of market where there are large number of sellers selling the differentiated product. There is no restrictions on the entry or exit in the monopolistic competition. The demand curve for monopolistic competition is inelastic as every firm sells differentiated product. The firms under monopolistic competition earn normal profits in long run and can run super normal profits in short-run.

Similarity bewteen monopolistic competition and perfect competition-

1.) There are large number of seller in both monopolistic competition and perfect competition.

2.) There is freedom of entry and exit in both monopolistic competition and perfect competiction.

Difference between monopolistic competition and perfect competition.

1.) The firms under monopolistic competition sell differentiated product where as in perfect competition the product sold by many sells is similar.

2.) The demand under monopolistic competition is inelastic as differentiated product is sold where the demand under perfect competition is elastic as similar product is sold.

3.) The firms under monopolistic competition can influence market price by individual actions where as in perfect competition the price is set by forces of demand and supply.

4.) The demand curve under monopolistic competition is downward sloping where as demand curve of perfect competition is horizontal to X-axis.

5.) Under monopolistic competition the average revenue is more than the marginal revenue where as in perefct competition the average revenue is equal to the marginal revenue.