Explain the difference between monopoly and monopolistic
competition.
Answers
Answer:
1. Nature of Product:
Under monopoly, product produced may or may not be homogeneous. But under monopolistic competition, there is always product differentiation.
2. Number of Buyers and Sellers:
Under monopoly, there are many buyers but only one seller. On the other hand, under monopolistic competition, there are close substitutes for the product, so there are many sellers of a product.
3. Entry and Exit:
Under monopoly, there are strong barriers on the entry of new firms. On the other hand, under monopolistic competition, new firms can enter into the market and same can exit the market. But it is possible only in the long run not in the short run.
4. Degree of Knowledge:
Under monopoly, we assume that the sellers and buyers have complete knowledge regarding market activities. But under monopolistic competition, there is imperfect knowledge on the part of buyers and sellers.
5. Revenue Curves:
Under monopoly, AR and MR are different. AR refers to price, MR refers to marginal revenue. These curves are less elastic. It means for a small increase in sales (demand), the monopolist has to reduce the price to greater extent. It means revenue curves are less elastic. Fig. 15 shows less elastic AR and MR. Under monopolistic competition also, the revenue curves are different but in this case, the revenue curves are more elastic. It means small fall in price, will lead to big increase in demand. Fig. 14 represents AR and MR under monopolistic competition.
6. Decision-Making:
Under monopoly and monopolistic competition, a firm cannot determine both price and output at the same time. Under monopolistic competition, the firm has to spend more on selling costs. On the other hand, under monopoly the firm has to spend a small amount on selling costs.
7. Nature of Profits:
In the short run, both under monopoly and monopolistic competition, the firm can enjoy super-normal profits, normal profits or can sustain losses. But in the long run, firm under monopolistic competition will enjoy only normal profits.