What is the major difference between perfect competition and monopolistic competition?
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Perfect competition and monopolistic competition are two types of economic markets. Show
SimilaritiesOne of the key similarities that perfectly competitive and monopolistically competitive markets share is elasticity of demand in the long-run. In both circumstances, the consumers are sensitive to price; if price goes up, demand for that product decreases. The two only differ in degree. Firm's individual demand curves in perfectly competitive markets are perfectly elastic, which means that an incremental increase in price will cause demand for a product to vanish ). Demand curves in monopolistic competition are not perfectly elastic: due to the market power that firms have, they are able to raise prices without losing all of their customers. Demand curve in a perfectly competitive marketThis is the demand curve in a perfectly competitive market. Note how any increase in price would wipe out demand. Also, in both sets of circumstances the suppliers cannot make a profit in the long-run. Ultimately, firms in both markets will only be able to break even by selling their goods and services. Both markets are composed of firms seeking to maximize their profits. In both of these markets, profit maximization occurs when a firm produces goods to such a level so that its marginalcosts of production equals its marginal revenues. DifferencesOne key difference between these two set of economic circumstances is efficiency. A perfectly competitive market is perfectly efficient. This means that the price is Pareto optimal, which means that any shift in the price would benefit one party at the expense of the other. The overall economic surplus, which is the sum of the producer and consumer surpluses, is maximized. The suppliers cannot influence the price of the good or service in question; the market dictates the price. The price of the good or service in a perfectly competitive market is equal to the marginal costs of manufacturing that good or service. In a monopolistically competitive market the price is higher than the marginal cost of producing the good or service and the suppliers can influence the price, granting them market power. This decreases the consumer surplus, and by extension the market's economic surplus, and creates deadweight loss. Another key difference between the two is product differentiation. In a perfectly competitive market products are perfect substitutes for each other. But in monopolistically competitive markets the products are highly differentiated. In fact, firms work hard to emphasize the non-price related differences between their products and their competitors'. A final difference involves barriers to entry and exit. Perfectly competitive markets have no barriers to entry and exit; a firm can freely enter or leave an industry based on its perception of the market's profitability. In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market. Recommended textbook solutions
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Principles of Economics8th EditionN. Gregory Mankiw 1,335 solutions Statistics for Business and Economics13th EditionDavid R. Anderson, Dennis J. Sweeney, James J Cochran, Jeffrey D. Camm, Thomas A. Williams 1,692 solutions Difference Between Perfect Competition vs Monopolistic CompetitionPerfect competition is a market structure in which there are numerous sellers in the market, selling similar goods that are produced/manufactured using a standard method and each firm has all information regarding the market and price, which is known as a perfectly competitive market. Monopolistic competition is a type of imperfect market structure. In a monopolistic competition structure, a number of sellers sell similar products but not identical products. Products or services offered by sellers are substitutes of each other with certain differences. A market can be described as a place where buyers and sellers meet, directly or through a dealer for transactions. Flowchart shows Market StructureWhat is the Perfect Competition?
What is Monopolistic Competition?
Just a few examples of monopolistic competition include:
Monopolistic competition is a practical example of a market scenario, it can be seen around us. Types of products or services provided by each market participant are differentiated. Products or services can be differentiated in many ways such as brand recognition, product quality, value addition to products or services or product placing, etc. Perfect Competition vs Monopolistic Competition (Infographics)Below is the top 10 difference between Perfect Competition and Monopolistic Competition: Key differences between Perfect Competition vs Monopolistic CompetitionBoth Perfect Competitions vs Monopolistic Competition are popular choices in the market; let us discuss some of the major Difference Between Perfect Competition and Monopolistic Competition:
Perfect Competition vs Monopolistic Competition Comparion TableBelow is the topmost Comparison between Perfect Competition vs Monopolistic Competition are as follows –
ConclusionAfter reading the all above points, it is quite clear that perfect competition vs monopolistic competition is different in many aspects, the major difference can be understood by the fact monopolistic competition has features of both monopoly and perfect competition. The principal difference between these two is that in the case of perfect competition the firms are price takers, whereas in monopolistic competition the firms are price makers. Perfect competition is not realistic, it is a hypothetical situation, on the other hand, monopolistic competition is a practical scenario. Recommended ArticlesThis has been a guide to the top difference between Perfect Competition vs Monopolistic Competition. Here we also discuss the perfect Competition vs Monopolistic Competition key differences with infographics, and comparison table. You may also have a look at the following articles to learn more
What is main advantage of monopolistic competition over perfect competition?The advantages of monopolistic competition
These can be: No significant barriers to entry; therefore markets are relatively contestable. Differentiation creates diversity, choice and utility. For example, a typical main street in any city will have a number of different restaurants to choose from.
What is difference between perfect competition and imperfect competition?Perfect competition is a concept in microeconomics that describes a market structure controlled entirely by market forces. If and when these forces are not met, the market is said to have imperfect competition. While no market has clearly defined perfect competition, all real-world markets are classified as imperfect.
What is the difference between perfect competition and competitive market?While a competitive market determines the equilibrium point by staying in tune with the supply and demand curves, a perfectly competitive market does not have that luxury. A perfectly competitive market must accept the price point and must only decide how much to sell.
What is the main difference between monopolistic competition and perfect competition?In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods.
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