Question

Differentiate between a perfectly competitive market and a monopolistically competitive market on the basis of the following:

1. Nature of product
2. Price influence
3. Relationship between AR and MR
4. Demand Curve

Answer 1

Sr. No.	Basis	Perfect Competition	Monopolistic Competition
1.	No. of sellers	A large number of sellers	Fairly large number of sellers
2.	No. of buyers	Large number of buyers	Large number of buyers
3.	Nature of the product	Homogeneous product	Differentiated product
4.	Nature of knowledge	Perfect knowledge	Some knowledge
5.	Nature of entry and exit	Free entry and exit	Free entry and exit
6.	Market power	No power	Slight power
7.	Nature of influence on price	Price-taker	Price-maker
8.	Selling cost	Does not exist	Exists
9.	Slope of the demand curve	Perfectly elastic	Negatively sloped, but more elastic
10.	Relationship between AR and MR	AR = MR	AR > MR
11.	Nature of profits (long run)	Normal	Normal

Answer 2

Basis	Perfectly Competitive Market	Monopolistically Competitive Market
(i) Nature of the product	Under this market, firms produce homogeneous products, which means products of various firms are perfect substitutes for one another, and there is zero degree of product differentiation. The cross elasticity of demand among the goods is ‘infinite’.	Under this market, all the firms produced differentiated products. Here, each firm produces a product that is somewhat different from the products of its competitors, but not completely distinct. The cross elasticity of demand among the goods is ‘very small’.
(ii) Price influence	In this market, a firm cannot have an independent price policy. The firm is a ‘price taker’. All sellers charge the same price for their goods. Each firm in the industry has a very small share in total output, due to which they have to accept the price determined by the industry. Price influence is not possible here.	In this market, a firm can have an independent price policy. It is a ‘price maker’. The sellers charge different prices for different goods. Here, the number of firms is limited. Thus, the firms can influence the market price by their individual actions.
(iii) Relationship of AR and MR	Under this market, AR and MR are equal, due to which both the curves coincide with each other and would be horizontal or parallel to the X-axis.	Under this market, AR is more than MR as the firms have to lower the price to increase sales. Thus, MR < AR. They are downward sloping flatter curves.
(iv) Demand curve	The demand curve of a firm under perfect competition is parallel to the X-axis, as the firm can sell any amount of its output without lowering the price. (Perfectly elastic demand)	The demand curve under this market slopes downward as each firm has to lower the price to increase sales. (Relatively inelastic/elastic demand)