Economics Perfect Competition and Monopolistic Competition

Topics: Economics, Perfect competition, Marginal cost Pages: 2 (616 words) Published: February 3, 2013
1a)Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. In perfect competition, there are a large number of firms in the industry. The firms in this industry are price takers as they sell at whatever price is set by demand and supply in the industry as a whole. All the firms produce homogeneous products which are exactly identical; it is impossible to distinguish between a good produced in one firm and a good produced in another firm. There are no barriers to entry or exit ; firms can enter or exit the market when they want to, however they don't have ability to stop new firms from entering and old firms from leaving the industry. Producers and consumers have perfect knowledge of the market i.e. the producers are fully aware of market prices, cost in the industry, and the workings of the market and the consumers are fully aware of prices in the market, the quality of the products, and the availability of the goods.

Monopolistic competition is a market structure with many competed firms and each firm has a little bit of market power to set prices. The industry is made up of large number of firms and each firm is able to set prices and therefore it has a downward sloping demand curve. There is free entry and exit of firms in response to profits in the industry. Each firm produces a product that is differentiated from all other products produced by the other firms in the industry and it is possible for consumers to tell one firm's product from another. Gaining abnormal profits is possible in short run but not in long run in the monopolistic competition market

3)In monopolistic competition Marginal Curve (MC) is below the Average Revenue curve (AR). Consumers have more additional benefit than the additional cost of production. Not allocatively efficient Monopolistic Competition Firms may not produce at the lowest possible cost (not productively...
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