Chapter 15, Problem 7P

To determine

Concept Introduction:

Monopolistic competition: Such a market structure has a less amount of competition Examples:Detergents, textiles, automobiles, shop, drawings and TV. The features of monopolistic competition are:

• Large number of buyers and sellers: In monopolistic competition market there are a large number of sellers and buyers.
• Product differentiation: This is one of the most important features of monopolistic competition. The product of the sellers is differentiated but are close substitutes of one another. It can be real or artificial. The demand curve monopolistic firms face is an elastic demand curve.
• Free Entry or Exit: There are no barriers to entry or exit, firms can easily enter or exit the market.
• Perfect Knowledge: Buyers and sellers are not aware, they lack some of the important knowledge which they must have. They are guided by advertising and other selling activities taken by the sellers.
• Selling Cost: In such markets, the firms have selling costs as the cost which is used for promoting the demand for its product.

Perfect Competition: It is a market structure in which there are almost no rivals in the market. In this type of market structure neither the seller nor the buyer can influence the market pricing which means both are price takers. The characteristics of perfect competition are:

• Large number of buyers and sellers: Due to this property buyers as well as sellers are price taker.
• Homogeneous Product: It implies that in perfect competition market goods are perfect substitutes for each other.
• Free entry or exit of firms: In perfect competition market, everyone has the liberty to enter or exit the market, there is no barriers to entry or exit. Due to this the firm earns a normal profit in the long run.

Monopoly: In this market, there is a single firm selling the output. The characteristics of monopoly are:

• Single Firm: In monopoly, there is only one seller.
• No close Substitutes: Such a market does not have any substitute, they produce all the output market, and this implies that monopolists are price makers.
• Barriers to entry: In such markets, there are significant barriers to entry due to some of the reasons like patent rights, control of resources, economies of scale, legal barriers, cartels etc.