IGNOU EEC 11 2015 2016 - Compare Monopolistic Competition with perfect competition and explain

Question

Compare Monopolistic Competition with perfect competition and explain which of the key
policy variables are for a monopolistic competitor?

30 Apr 2017

Answer :

Word Count : 1055

A monopolistic market and a perfectly competitive market are two market structures that have several key distinctions, such as market share, price control and barriers to entry. In a monopoly, there is only one firm that dictates the price and supply levels of goods and services and has total market control. Contrary to a monopolistic market, a perfectly competitive market is comprised of many firms, where no one firm has market control.

In a monopolistic market, prices are generally high for goods and services because firms have total control of the market. In this type of market, firms are price makers because they control the market prices of goods and services. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms able to enter the market are still dominated by one bigger firm. A monopolistic market generally involves a single seller, and buyers do not have a choice of where to purchase their goods or services.

In a market that experiences perfect competition, prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has total market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low and allow firms to enter and exit easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers are able to choose where they buy their goods and services.

Similarities

The two market situations have the following similarities.

The number of firms is huge under perfect competition and monopolistic competition.

The freedom of entry and exit of firms is there in both the firms.

Firms compete with each other.

The break even point is established where marginal cost and marginal revenue are equated.

In both the market conditions, firms can earn super normal or abnormal profits and can also incur short run loses. Whereas in the long run, firms earn only normal profits.

Dissimilarities

There are nevertheless certain points of dissimilarities in both the market situations.

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