Question

Explain the Assumptions of Competition and Monopolistic Competition. Give an example of each form of market structure.

Explain the pricing decisions of Competition and Monopolistic Competition. What long run profits are expected at each firm? Explain

Answer 1

by competition we generally mean perfect competitive market structure where the assumptions are as follows-

1)large no. of buyers and sellers

2) perfect knowledge about the market

3)free entry and free exit

4) price taking behaviour of the firm

5)normal profit etc

as perfect competition market structure is a myth in economic theories or in general no such market structure is generally seen in the real world.

monopolistic competition is a market structure with the following assumptions-

1) free entry and exit

2) product differentation

3) little control over the market

4)large no. of buyers and sellers

4) excess capacity etc.

these type of market structure are very commonly seen. for example tooth pest company.

the pricing decissions of perfect competition as well as the monopolistic competition is based on the equilibrium conditions such as

1)the marginal revenue = marginal cost in this case the the price and quantity will be fixed according to the equilibrium of the firm.

in the long run both the firm will earn normal profit only and this will happen because of free entry and exit condition of both the market structure.