State any two ways by which monopolistic competition and perfect competition are similar and any three ways in which they are different.
Question 1 Report
State any two ways by which monopolistic competition and perfect competition are similar and any three ways in which they are different.
Answer Details
Two ways they are similar
- Both have a large number of buyers and sellers, so no single buyer dominates the market.
- Both allow freedom of entry into and exit from the industry, so in the long run firms earn only normal profit.
Three ways they differ
| Perfect competition | Monopolistic competition |
|---|---|
| Products are homogeneous (identical). | Products are differentiated (close but not identical substitutes). |
| The firm is a price taker with a perfectly elastic (horizontal) demand curve. | The firm has some control over price and faces a downward-sloping demand curve. |
| There is no advertising or selling cost because goods are identical. | Firms advertise and incur selling costs to distinguish their brands. |
A further difference is that buyers and sellers have perfect knowledge of the market under perfect competition, but only imperfect knowledge under monopolistic competition.
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