What is the difference between perfect competition and monopolistic competition?
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Some of the main differences between perfect competition and monopolistic competition are as follows:
1. Nature of Firms:
Under perfect competition an industry consists of a large number of firms. Each firm in the industry has a very little share in the total output.
The firms have to accept the price determined by the industry. On the other hand, under monopolistic competition the number of firms is limited.
2. Nature of Price and Output:
Under perfect competition price is equal to marginal cost as well as marginal revenue whereas under imperfect competition it is not so. Although, under monopolistic competition marginal cost and marginal revenue are equal yet not equalizing the price.
3. Nature of Profits:
Under monopolistic competition firms get super normal profits only in the short period. But, in the long run the existence of super-normal profits disappears. It is so because in the long period price becomes equal to average cost of production. In case of perfect competition, the situation is slightly different.
4. Nature of Product:
Under perfect competition, firms produce homogeneous products. The cross elasticity of demand among the goods is infinite. Under imperfect competition, all the firms produce differentiated products and the cross elasticity of demand among them is very small.
1. Nature of Firms:
Under perfect competition an industry consists of a large number of firms. Each firm in the industry has a very little share in the total output.
The firms have to accept the price determined by the industry. On the other hand, under monopolistic competition the number of firms is limited.
2. Nature of Price and Output:
Under perfect competition price is equal to marginal cost as well as marginal revenue whereas under imperfect competition it is not so. Although, under monopolistic competition marginal cost and marginal revenue are equal yet not equalizing the price.
3. Nature of Profits:
Under monopolistic competition firms get super normal profits only in the short period. But, in the long run the existence of super-normal profits disappears. It is so because in the long period price becomes equal to average cost of production. In case of perfect competition, the situation is slightly different.
4. Nature of Product:
Under perfect competition, firms produce homogeneous products. The cross elasticity of demand among the goods is infinite. Under imperfect competition, all the firms produce differentiated products and the cross elasticity of demand among them is very small.
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Answer:
The principal difference between these two is that in the case of perfect competition the firms are price takers, whereas in monopolistic competition the firms are price makers. Perfect competition is not realistic, it is a hypothetical situation, on the other hand, monopolistic competition is a practical scenario.
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