Economics论文模板 – The Difference between Perfect Competition Market Structure and Monopolistic Competition Market Structure

Introduction

        There are different market structures where some have few businesses and firms and it is difficult to enter the structure where are others have many firms in them and it is easier to enter the market structure. The market structure has a big impact on the prices and quantity outcome. My main focus in this essay is to evaluate the comparison and difference of the perfect completion market structure and the monopolistic completion market structure (Aumann, 1994). This will include the comparison and the contract of the two market structure and their reaction under similar situations.

The difference between Perfect Competition and Monopolistic Competition Market Structure

In perfect market completion, there is only one large firm which supplies a certain good or services and it determines the price of its product since the consumers have no alternative and it is very difficult for other competitors to enter in to the business (Kreps, 1990). All products are homogenous and therefore limit consumers from making any preference for different firms. New firms can easily enter this market but lack control over the price they charge for their product. In this type of market each firm supplies only a small portion of the total output in the industry (Clifton, 1997). However, the market for perfect competition market is rare. A good example of a business in the perfect competition market structure foreign currency exchange where the product is homogenous. Each trader in the foreign currency is small and they have to take the given price for the currency (Aumann, 1994).

        On the other hand, monopolistic competition market structure describes a common market structure in which individual firms have many competitors. The products in the monopolistic market structure are relatively different from one firm to the other (Clifton, 1997).

In monopolistic competition market structure, each firm has the freedom to determine their price since they each firm can differentiate its products from those of other firms. Each firm produces a product that is unique in the market. It is relatively easy for firms to enter or exit the market structure. Both the consumer and the producer in this market structure have a perfect knowledge about the market. High profit attracts new firms into the market (Petri, 2004). This increases supply in the market and price fall in turn. However, there are barrier to the entrance into the market. Good examples of businesses under the monopolistic competition market structure include restaurants and the independently owned and operated high-street stores (Clifton, 1997).

The Similarities and Differences in Relation to the Same Situation

Normal Profit in the Long Run Outcome for both Perfect Competition and Monopolistic Competition

In long run, both monopolistic competition and perfect competition firms achieve normal profit by producing goods or service at a lower revenue cost than the price. They produce their products at the point of intersection between the long run marginal costs (LRMC) and the marginal revenue (MR). The price is set at the point where the quantity produced falls on the average revenue curve (AR). The result in the long run is that the firm will break even. In the long run, firm in monopolistic competitive market are inefficient both in the productive and allocative efficiency (Roberts, 1997). In perfect competition however, economic profit cannot be sustained in the long run. The normal profit goes down as new firms enter the market shifting down the demand curves of individual firms. This brings down the average revenue, the price and the marginal revenue curve (Kirzner, 1981). The firm in perfect competition market makes zero economic profit in the long run. The demand curve which is horizontal touches the cost curve at its lowest point .In the long run, more firms enter the market due to the positive profit observed in the short run hence increasing supply into the market  (Roberts, 1997). This lowers the price therefore reducing the economic profit.

Monopolistic Competition in the Long Run

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Perfect Competition in the Long-Run

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Sub-Normal Profit in the Short-Run

     Firms in both perfect competition market and monopolistic competition market may experience sub-normal profit in the short-run. This is a condition where the production cost per unit of the output of the product is higher than the price of the products per unit or a situation where the total revenue is lower than the total cost. The figure below shows sub-normal profit in short run for both perfect competition market and monopolistic competition market.

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From the diagram, the production cost is higher than the price per unit (P). This is shown by the average cost curve (AC) which is above the demand curve. This therefore shows sub-normal profit of the firm in the short run.

Subnormal profit is only experienced in the short run since most firms close down in the long run if they are making losses. Firms run in the short-run if when making sub-normal profit so as they can pay part or whole of the fixed cost.

Conclusion

We can therefore conclude that the main difference between perfect competition market and monopolistic competition market is the efficiency. There are no berries of entry and exit in perfect competitive market unlike in monopolistic competitive market where are a few barriers of entry or exit. There is also no great degree of difference in the products or services in monopolistic competition unlike in perfect competition market structure. The two market structures also have the same elasticity of demand which is mainly on how to determine conditions of profit maximizing quantities.

References

Aumann, R. J. (1994). Markets with a Continuum of Traders, Econometrica, Vol. 32, No. 1/2, Jan.–Apr.

Clifton, J. A. (1997). Competition and the evolution of the capitalist mode of production, Cambridge Journal of Economics, vol. 1, no. 2.

Kirzner, I. (1981). The ‘Austrian’ perspective on the crisis, in D. Bell and I. Kristol (eds), The Crisis in Economic Theory, New York: Basic Books.

Kreps, D. M. (1990). A Course in Microeconomic Theory, New York: Harvester Wheatsheaf.

Petri, F. (2004). General Equilibrium, Capital and Macroeconomics, Cheltenham: Edward Elgar.

Roberts, J. (1997). Perfectly and imperfectly competitive markets, The New Palgrave: A Dictionary of Economics, v. 3.

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