Monopolistic competition and perfect competition are two types of market structures that describe the behaviour of firms and consumers in a market. Here are the main similarities and differences between monopolistic competition and perfect competition:
- Both market structures are characterized by many small firms operating in the market.
- Both market structures assume that firms aim to maximize their profits.
- Both market structures assume that consumers aim to maximize their utility.
- Number of Firms: In perfect competition, there are many firms, whereas in monopolistic competition, there are still many firms, but they are slightly fewer than in perfect competition.
- Product Differentiation: In monopolistic competition, firms produce slightly differentiated products, while in perfect competition, firms produce homogeneous or identical products.
- Entry and Exit Barriers: There are no barriers to entry or exit in perfect competition, whereas in monopolistic competition, there are low barriers to entry, but high barriers to exit.
- Price Control: In perfect competition, the price of the product is determined by market forces of supply and demand, while in monopolistic competition, firms have some control over the price of their products, because their products are slightly differentiated.
- Advertising: In monopolistic competition, firms often engage in advertising and other marketing activities to differentiate their products, while in perfect competition, advertising is unnecessary, since all firms produce the same product.
- Profit Maximization: In perfect competition, firms have no market power and are price takers, so they produce at the point where marginal cost equals price and earn zero economic profit in the long run. In monopolistic competition, firms have some market power, and they produce where marginal revenue equals marginal cost, earning positive economic profit in the short run, but zero economic profit in the long run.
In summary, monopolistic competition and perfect competition differ in terms of the number of firms, product differentiation, entry and exit barriers, price control, advertising, and profit maximization. Understanding these differences is important for firms to make strategic decisions about their pricing, advertising, and product differentiation strategies.
SIMILARITIES AND DIFFERENCES BETWEEN MONOPOLISTIC COMPETITION AND PERFECT COMPETITION
There is free entry and exit in both markets.
- There is excess or abnormal profit for both in the short run.
- There is a large number of firms in both markets.
- Profit is maximized when the marginal cost (MC) equals marginal revenue (MR).
DIFFERENCES BETWEEN MONOPOLISTIC COMPETITION AND PERFECT COMPETITION
|Monopolistic competition||Perfect competition|
|1||There is product differentiation, i.e. products are heterogeneous.||It has control over price or output, i.e. it is a price giver.|
|2||It has no control over price, i.e. it is a price taker.||There is a duplication of resources|
|3||Different prices rule the market||Priced is fixed|
|4||Price and quantity are determined by the producer or supplier||Price and quantity are determined by the interaction of the forces of demand and supply|
|5||Entry and exit are restricted||There is free entry and exit|
|6||Price is higher than both MC and MR||The equilibrium level is established where MC = MR = P|
|7||There is only one or single producer or supplier or firm of a particular commodity and many buyers||There are many buyers and sellers or firms in the industry|
|8||They can discriminate due to different elasticity of demand for the products.||Absence of discrimination because there is perfect elasticity of demand|
|9||There is under-utilization of resources||They make abnormal profits only in the short run.|
|10||There is no perfect knowledge, i.e. knowledge is limited||The demand curve is downward sloping|
|11||There is perfect knowledge of the market situation||It is perfectly inelastic, i.e. it remains the same at all levels of output.|
|12||Transport cost is included in the price||They make abnormal profits in the short and long runs|
|13||They make abnormal profit in the short and long runs||Transport cost is excluded from the price|
- how to establish enterprises
- what is a firm
- price equilibrium
- scale of preference
- concept of economics
- economic tools for nation building
- factors affecting the expansion of industries
- mineral resources and the mining industries
- RINDER PESTS
148. NEWCASTLE DISEASE
149. BACTERIA DISEASES
153. FUNGAL DISEASES