PERFECT COMPETITION VS MONOPOLISTIC COMPETITION — DIFFERENCES AND SIMILARITIES

Perfect competition is a market structure where many buyers and sellers of homogenous goods have perfect knowledge of the prevailing market conditions.

Monopolistic competition, on the other hand, is a market structure where there are many buyers and sellers of slightly differentiated goods.

Both have similarities and differences, which we'll go through in this post

Similarities Between Perfect Competition And Monopolistic Competition

1. Both have a large number of firms: There are many firms in both perfect competitive market and monopolistic competitive market.

2. Competition exit in both market structures: Competition exists in both perfect competition and monopolistic competition due to the ence of large numbers of firms

3. Firms do not earn abnormal in both: Due to the ease with which firms can enter and depart the market, It is highly unlikely that firms in both perfect competition and monopolistic competition earn abnormal profits in the long run.

4. Both maximize profit: Both are perfect competitive firms and monopolistic competitive firms maximize profit at the output where marginal revenue is equal to marginal cost.

5. Both firms can earn abnormal profit or loss: In the short run, both firms in perfect and monopolistic competition can make economic profits if the price is higher than the average cost at the profit-maximizing level

Both firms in perfect and monopolistic competition can also suffer economic losses in the short run when the price is lower than the average cost at the profit-maximizing level.

READ ALSO: PERFECT COMPETITION VS MONOPOLY

Difference Between Perfect Competition And Monopoly

1. In a perfectly competitive market, products are homogeneous or identical, however, in a monopolistic competitive market, products are slightly differentiated.

2. Goods sold in perfect competition are perfect substitutes, whereas goods sold in monopolistic competition are close substitutes.

3. The demand curve of a perfect competitor is perfectly elastic indicating that a firm may lose nearly all of its sales to competitors if it decides to raise its price above the prevailing market price.

A monopolistic competitor, on the other hand, has a downward-sloping demand curve, showing that price and quantity are inversely related.

4. A perfect competitor's demand curve is the same as its marginal revenue, whereas a monopolistic competitor's demand curve is above its marginal revenue.

5. A perfectly competitive firm charges the same price as its marginal cost, indicating that the firm is allocatively efficient.

In contrast, the price charged by a monopolistic competitive firm equals its marginal cost, indicating that the firm is allocatively inefficient.

6. While perfect competitive firms are price-takers, monopolistic competitive firms are price takers

7. Perfectly competitive firms are productively efficient because their marginal cost equals their long-run average cost

On the contrary, monopolistic competitive firms are productively inefficient because their marginal cost does not equal long-run average cost.

8. There are no barriers to entry in a perfectly competitive market whereas there are low barriers to entry in a monopolistic competitive market.

9. While buyers and sellers have perfect knowledge of prevailing market conditions in perfect competition, buyers and sellers have imperfect knowledge of prevailing market conditions in monopolistic competition.

10. Excess capacity is a common feature of monopolistic competition whereas the excess feature is a not feature of perfect competition.

In monopolistic competition, excess capacity is the difference between the optimum output and the output attained in the long run.

11. In monopolistic competition, non-price competition (such as advertising) is quite widespread, whereas non-price competition is irrelevant in perfect competition.

READ ALSO: MONOPOLISTIC COMPETITION VS MONOPOLY

Tabular Comparison Of Perfect Competition And Monopolistic Competition

Market structure/featuresPerfect competitionMonopolistic competition
Numbers of firmsVery largelarge
Demand curvePerfectly elasticdownward-sloping
Non-price competitionNoyes
Knowledge of market conditionsperfectImperfect
Barriers to entryNonelow
Productively efficientTruefalse
Type of goodsperfect substitutesClose substitutes
Price equals marginal revenuetruefalse

This wraps us our comparison of perfect competition and monopolistic competition. If you have questions about this post, do well to ask our telegram community.

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