Distinguish between a perfect market and a monopolistic market.
Question 1 Report
Distinguish between a perfect market and a monopolistic market.
Answer Details
A perfect (perfectly competitive) market and a monopolistic (imperfectly competitive) market differ on several like features:
| Feature | Perfect market | Monopolistic market |
|---|---|---|
| Number of sellers | Very many sellers, each too small to affect price | One seller (pure monopoly) or few, so the seller has market power |
| Nature of product | Homogeneous (identical) products | Unique product with no close substitute |
| Price control | Firm is a price taker; price set by market demand and supply | Firm is a price maker/setter; can influence price |
| Entry and exit | Free entry and exit into the industry | Barriers to entry (patents, control of raw materials, large capital, law) |
| Knowledge | Perfect knowledge of market by buyers and sellers | Imperfect knowledge of the market |
| Demand curve facing the firm | Perfectly elastic (horizontal) at the ruling price | Downward sloping demand curve |
| Price and output | Lower price, larger output; normal profit in the long run | Higher price, smaller output; can earn abnormal (super-normal) profit in the long run |
In short, perfect competition has many sellers of an identical product who are price takers with free entry, while a monopoly has a single price-making seller of a unique product protected by barriers to entry.
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