Key Differences between Perfect and Monopolistic Competition

The basic differences between perfect competition and monopolistic competition are indicated in the following points:

1. A market structure, where there are many sellers selling similar goods to the buyers, is perfect competition. A market structure, where there are numerous sellers, selling close substitute goods to the buyers, is monopolistic competition.
2. In perfect competition, the product offered is standardized whereas in monopolistic competition product differentiation is there.
3. In perfect competition, the demand and supply forces determine the price for the whole industry and every firm sells its product at that price. In monopolistic competition, every firm offers products at its own price.
4. Entry and Exit are comparatively easy in perfect competition than in monopolistic competition.
5. The slope of the demand curve is horizontal, which shows perfectly elastic demand. On the other hand, in monopolistic competition, the demand curve is downward sloping which represents the relatively elastic demand.
6. Average revenue (AR) and marginal revenue (MR) curve coincide with each other in perfect competition. Conversely, in monopolistic competition, average revenue is greater than the marginal revenue, i.e. to increase sales the firm has to lower down its price.
7. Perfect competition is an imaginary situation which does not exist in reality. Unlike, monopolistic competition, that exists practically.

Conclusion

After reviewing the above points, it is quite clear that perfect competition and monopolistic competition are different, where monopolistic competition has features of both monopoly and perfect competition. 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.

Definition of Perfect Competition

The market structure in which there are numerous sellers in the market, offering similar goods that are produced using a standard method and each firm has complete information regarding the market and price, is known as a perfectly competitive market. The entry and exit to such a market are free. It is a theoretical situation of the market, where the competition is at its peak.

The firms are price takers in this market structure, and so, they do not have their own pricing policy. The individual buyers and sellers have no control over the prices. Therefore, the sellers have to accept the price ascertained by the demand and supply forces of the market and sell the product, as much as they can at the price prevailing in the market. As the product offered for sale is identical in all respects, no firm can increase the price than that of prevailing in the market, because if a firm increases its price, then it will lose all the demand, to the competitors.

Definition of Monopolistic Competition

Monopolistic Competition refers to a type of market structure, where the number of sellers selling similar but not exactly identical products, is large. The product or services offered for sale in a monopolistic competition are close substitutes for one another. Such a market contains the features of both monopoly and perfect competition and is found in the real world situation. The salient features of a monopolistic competition are given below:

• It is a non-price competition. The firms are price makers, and so every firm has its own pricing policy, and thus the sellers are free to make decisions regarding the price and output, on the basis of the product.
• The entry and exit, into and out of the industry are easy because of fewer barriers.
• Product differentiation exists in a monopolistic competition, where the products are distinguished from each other on the basis of brands.
• Highly elastic demand curve.

Economies and Diseconomies of Scale

In economics, returns to scale describes what happens when the scale of production increases over the long run when all input levels are variable (chosen by the firm). Returns to scale explains how the rate of increase in production is related to the increase in inputs in the long run. There are three stages in the returns to scale: increasing returns to scale (IRS), constant returns to scale (CRS), and diminishing returns to scale (DRS). Returns to scale vary between industries, but typically a firm will have increasing returns to scale at low levels of production, decreasing returns to scale at high levels of production, and constant returns to scale at some point in the middle.

• Increasing Return of Scale: The first stage, increasing returns to scale (IRS) refers to a production process where an increase in the number of units produced causes a decrease in the average cost of each unit. In other words, a firm is experiencing IRS when the cost of producing an additional unit of output decreases as the volume of its production increases. IRS may take place, for example, if the cost of production of a manufactured good would decrease with the increase in quantity produced due to the production materials being obtained at a cheaper price.
• Constant Return of Scale: The second stage, constant returns to scale (CRS) refers to a production process where an increase in the number of units produced causes no change in the average cost of each unit. If output changes proportionally with all the inputs, then there are constant returns to scale.
• Diminishing Return of Scale: The final stage, diminishing returns to scale (DRS) refers to production for which the average costs of output increase as the level of production increases. The DRS is the opposite of the IRS. DRS might occur if, for example, a furniture company was forced to import wood from further and further away as its operations increased.

Marginal Cost

In economics, marginal cost is the change in the total cost when the quantity produced changes by one unit. It is the cost of producing one more unit of a good. Marginal cost includes all of the costs that vary with the level of production. For example, if a company needs to build a new factory in order to produce more goods, the cost of building the factory is a marginal cost. The amount of marginal cost varies according to the volume of the good being produced. Economic factors that impact the marginal cost include information asymmetries, positive and negative externalities, transaction costs, and price discrimination. Marginal cost is not related to fixed costs. An example of calculating marginal cost is: the production of one pair of shoes is Rs.30. The total cost for making two pairs of shoes is Rs.40. The marginal cost of producing the second pair of shoes is Rs.10.