Perfect Competition and Monopolistic Competition
What is Perfect Competition?
Perfect Competition is a market structure characterized by a large number of small firms, homogeneous products, free entry and exit, perfect information, and no control over prices by individual firms.
How are prices determined in a perfectly competitive market?
Prices are determined by the forces of supply and demand. Individual firms accept the market price as given.
What happens to profits in the long run in perfect competition?
In the long run, firms earn only normal profits (zero economic profit). Any economic profits attract new firms, increasing supply and driving prices down until only normal profits remain.
Why is perfect competition considered efficient?
Perfect competition leads to allocative and productive efficiency. Resources are allocated to their most valued uses, and goods are produced at the lowest possible cost.
What is a monopolistic competition market?
A monopolistic competition market is a market structure where many firms sell similar but not identical products, allowing them some degree of market power.
How do firms determine prices in a monopolistic competition market?
Firms have some control over prices due to product differentiation. They set prices based on their costs, demand, and the degree of differentiation from competitors’ products.
What happens to profits in the long run in a monopolistic competition market?
In the long run, firms tend to earn normal profits because the entry of new firms (attracted by short-term profits) increases competition and drives down prices.
How do firms compete in a monopolistic competition market?
Firms compete on factors other than price, such as product quality, features, branding, customer service, and advertising.
Difference between Perfect Competition and Monopolistic Competition
The number and types of firms operating in an industry and the nature and degree of competition in the market for the goods and services is known as Market Structure. To study and analyze the nature of different forms of market and issues faced by them while buying and selling goods and services, economists have classified the market in different ways. The different forms of market structure are Perfect Competition and Imperfect Competition (Monopoly, Monopolistic Competition, and Oligopoly).