Question

in 200 words write a paper that contrast a perfectly competitive firm and a monopolistically competitive market.

Answer 1

Perfect Competition-

In a market which experiences perfect competition, price levels are dictated by supply & demand. Companies in a perfectly competitive market are price takers as no one company has sufficient market control. Unlike a monopoly, producers in a perfectly competitive market have a minute market share. Hurdles to entry are comparatively low & permit firms to enter & exit effortlessly. Contrary to a monopoly, a perfectly competitive market has several purchasers & sellers, and customers are able to choose where they purchase their commodities.

Firms earn just sufficient profit to remain in business & no more. If they were to earn excessive profits, other firms would enter the market & pull the profits down. As such, its difficult to find actual-life instances of perfect competition.

Monopolistic Competition-

In between a monopoly & perfect competition lies monopolistic competition. In monopolistic competition, there are several producers & customers in the marketplace, and all companies only have a certain degree of market control, while a monopolist in a monopolistic market has complete control of the market. Unlike a monopoly, monopolistic competition offers few hurdles to entry. All producers are able to enter into a marketplace if they feel the level of profits are attractive enough. This makes monopolistic competition like perfect competition.

But, in a monopolist competitive marketplace, there’s product differentiation. Goods are close substitutes; the goods have distinct features, like branding / quality. This is unlike both a monopoly, where there aren’t any substitutes for goods, and perfect competition, where the goods are identical.