Question

1. Describe the difference between Monopolistic Competition and Monopoly market structures.
2. Define whether the monopolistically competitive market structure is a price taker or a price maker.

Answer 1

Yes , there is difference between the monopolistic competition and the monopoly market. In the monopoly market there is only one seller and so the seller has complete control over the market and can charge any price he wants. The monopolist is a price maker, the market is characterized high barriers to entry such as the economies of scale, ownership of a key resource act as the barriers to trade. The monopolist firm makes positive profits in the short run as well as the long run , this is because of the high barriers to trade. The monopolist charges a very high price, and the price would be above the marginal cost. There is a unique product i n the monopoly market.

In the monopolistic market the product is differentiated due to this the firms hold some kind of market power. There are many sellers and large number of buyers and there is freedom of entry and exit. So the firms only earn positive profits in the short run, in the long run other firms will come into the market and suck out the profit. In the long run the monopolistic competitive firms earn zero economic profits. In the monopolistic market the firms has got reserve capacity that is the firms will not produce at the minimum of the average total cost which gives them the reserve capacity.

The monopolistic competitive firm is a price maker ( due to the differentiated products).