Economics Essay Example | Topics and Well Written Essays - 1000 words - 21

Economics - Essay Example The sellers have an ‘insignificant’ market share in a perfectly competitive market, implying that each firm is acting as a price-taker. In monopolistic competition, on the other hand, has as many producers and consumers as the perfect competition. Producers enjoy a degree of control over price. The products sold and purchased in a perfectly competitive market are homogeneous, which are perfect substitutes for each other. In contrast, the products sold in the monopolistically competitive market are heterogeneous. In other words, when a large number of buyers and sellers interact to buy and sell heterogeneous products we have monopolistic competition. Thus, a monopolistically competitive market differs with a perfectly competitive market mostly because of product differentiation, i.e. products are not perfect substitutes. Monopolistic competition involves many aspects of non-price competition. Marginal Revenue (MR) =Marginal Cost (MC) = Price (P) =Average Revenue (AR) = Average Cost (AC). In short run, new firms enter the market, in case the existing firms are making supernormal profits, thereby making reallocation of resources within the market. Given demand remains unchanged, the increased output (with new firms entering the market) shifts the aggregate supply curve to the right and drives the equilibrium market price down until price equates long run average cost. Thus, long run equilibrium is established as firms having no incentives now to move in or out of the market. Hence, in the long run firms make normal profits. In perfect competition ‘allocative efficiency’ is achieved, both in short run and long run, since price equates marginal cost. Production efficiency, occurring when price is equal to average cost at its minimum, is, however, achieved only in the long run. Combining the two, it can be said in the long run optimal levels of ‘static economic efficiency’ is reached in perfect competition. MR