Answer to Question #19485 in Microeconomics for Joarder Toufiq Monowar
Product: This is the big difference between monopolistic competition and perfect competition.
Whereas in perfect competition, the product sold by the numerous firms in
the market is homogenous, in monopolistic competition the products offered
are similar but differentiated, or non-homogenous.Price takers: Unlike firms in perfectly competitive markets, monopoly competitive firms do have
a small amount of control over the price they charge. Their demand curve
is not perfectly elastic, but it is relatively elastic. In other words,
the demand curve is very flat, but not horizontal. Remember that the
products are slightly different, but basically very similar. This means
that each firm faces a lot of substitutes, so the elasticity of demand is
very high.Graphically, the demand curve AR of a firm is perfectly elastic under perfect competition and the marginal revenue MR curve
coincides with it. As against this, the demand curve of a firm is elastic
and downward inclining under monopolistic competition and its
corresponding MR curve lies below it. It entails that a firm will have to
reduce the price of its product to increase its sales by attracting some
customers of its competitors, provided latter do not reduce their prices. Though the equilibrium stipulations of the two market conditions are the same yet there are disparities in the price marginal
cost relationship between the two. When under perfect competition MC = MR,
price also equals them since price AR = MR. This is for the reason that,
the AR curve is horizontal to the X axis. Since the AR curve inclines downward
to the left, the MR curve is below it under monopolistic competition. So
price, AR > MR = MC.Another disparity amid the two market situations corresponds to their dimensions. In the long run competitive firms are of
the optimum sized and produce to their full capacity for the reason that
prior AR = LMC = LAC at its minimum. But under monopolistic competition
the firms are of less than the optimum size and possess surplus capacity
since the AR curve is downward inclining and cannot be tangent to LAC curve
at its minimum point. The firm’s equilibrium situation is Price AR = LAC
> LMC = MR.Yet another dissimilarity among the two with respect to selling cost. There is no problem with regards to selling under perfect
competition since products are standardised and hence no selling costs.
The firm can sell the ruling market price any quantity of its product.
Whereas under monopolistic condition, the product is diversified and
selling costs are obligatory to promote sales. They are incurred to
influence a purchaser to buy one commodity in choice to other.The ultimate decision amid the perfect competition and monopolistic competition is that the output of the firm under monopolistic
competition is lesser and price is higher than under perfect competition.
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