Question

(a) “Monopolistic competition has elements of both competition and monopoly”. Analyze and discuss this statement, paying particular attention to both the short and long run.

Answer 1

Yes , the monopolistic competition has the characterstics of both the perfect competition and the monopoly. The monopolistic competition as well as the competition has the freedom of entry and exit so there is barrier to trade for both market structures. The monopolistic competition and the perfect competition earns positive profits in the short run and zero economic profits in the long run. If the firm is earning a positive profit in the short run other firms will be attracted by this and they will keep entering the market until the economic profits equals zero.

The similarity between the monopolistic competition is that , the price is above marginal cost in both markets. The monopoly as well as the monopolistic markets has market power and this allows them to charge a price that is above the marginal cost. The monopoly and the monopolistic markets are price makers, the monopoly is a single seller so it obviously has the market power. In the monopolistic market it is the differentiated products that gives the market power to the firm.

The profit maximization condition for the three markets is the same, they maximize the profits where the marginal cost equals the marginal revenue.