π Perfect Competition: The Basics
Perfect competition is a market structure where many firms sell identical products. Think of farmers selling corn β there are tons of them, and one farmer's corn is pretty much the same as another's. Because of this, no single firm has the power to influence the market price; they are price takers. Entry and exit into the market are also super easy.
π€ Monopolistic Competition: The Basics
Monopolistic competition, on the other hand, features many firms selling differentiated products. Think of the restaurant industry. There are many restaurants, but each tries to offer something unique β different cuisines, ambiance, or service. Firms have some control over their prices because of this product differentiation, but there are still many substitutes available. Entry and exit are relatively easy, though maybe not quite as effortless as in perfect competition.
π Perfect Competition vs. Monopolistic Competition: Key Differences
| Feature |
Perfect Competition |
Monopolistic Competition |
| Number of Firms |
Large number |
Large number |
| Product Differentiation |
Homogeneous (identical) |
Differentiated |
| Price Control |
Price taker |
Some price control |
| Entry/Exit Barriers |
Very low |
Low |
| Examples |
Agricultural markets (e.g., corn, wheat) |
Restaurants, clothing stores |
| Demand Curve Faced by Firm |
Perfectly elastic (horizontal) |
Relatively elastic (downward sloping) |
| Long-Run Profit |
Zero economic profit |
Zero economic profit |
π Key Takeaways
- βοΈ Perfect Competition: Many firms, identical products, no price control, easy entry/exit.
- β¨ Monopolistic Competition: Many firms, differentiated products, some price control, relatively easy entry/exit.
- π Demand Curves: Perfectly elastic demand in perfect competition versus relatively elastic demand in monopolistic competition.
- π° Profit: Both market structures tend towards zero economic profit in the long run.