Answer in detail
1. What is Monopolistic Competition? Explain in detail the features of Monopolistic Competition.
Monopolistic competition is very realistic in nature. In this market there are some features of perfect competition and some features of monopoly acting together. Prof. E. H. Chamberlin coined this concept in his book “Theory of Monopolistic Competition” which was published in 1933.
Definition: According to Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes.”
Following are the main features of monopolistic competition:
1) Fairly large number of sellers: In monopolistic competition, the number of sellers is large but comparatively, it is less than that of perfect competition. Due to this reason, sellers’ behaviour is like a monopoly.
2) Fairly large number of buyers: In this market, there are fairly large numbers of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand.
3) Product differentiation: Product differentiation is the main feature of monopolistic competition. In this market, there are many firms producing a particular product, but the product of each firm is in some way differentiated from the product of every other firm in the market. This is known as product differentiation. Product differentiation may take the form of brand names, trademarks, a peculiarity of package or container, shape, quality, cover, design, colour etc. This means that the product of a firm may find close substitutes and its cross elasticity of demand is very high. For example, mobile handsets, cold drinks etc.
4) Free entry and exit: Under monopolistic competition there is freedom of entry and exit, that is new firms are free to enter the market if there is profit. Similarly, they can leave the market, if they find it difficult to survive.
5) Selling Cost: Selling cost is peculiar to monopolistic competition only. It refers to the cost incurred by the firm to create more demand for its product and thus increase the volume of sales. It includes expenditure on advertisements, radio and television broadcasts, hoardings, exhibitions, window display, free gifts, free samples etc.
6) Close substitutes: In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps, toothpastes etc.
7) Concept of group: Under monopolistic competition, Chamberlin introduced the concept of ‘Group’ in place of industry. Industry means the number of firms producing identical products. A ‘Group’ means a number of firms producing differentiated products which are closely related. For example, a group of firms producing medicines, automobiles etc.
2. What is meant by Perfect competitions? State its features.
ANS: -Perfect competition is defined as a market structure that consists of a large number of buyers and sellers such that no individual seller can influence the existing market price of the product. All the sellers in a perfect competition market produce homogenous products; that is, the output of all sellers is similar to each other and each firm sells its output at a uniform price.
The following are the features of perfect competition:
1) Large number of buyers and sellers- Under perfect competition, there are a large number of buyers and sellers. The number of sellers is so large that no individual firm has control over the market price of the commodity.
2) Free entry and exit of firms- There is no restriction on the entry and exit of firms. This free entry and exit of the firms ensure that no firm earns either abnormal losses or abnormal profits in the long run.
3) Homogeneous product- The product of each and every firm in the perfectly competitive market is a perfect substitute to others’ products in terms of quantity, quality, colour, size, features, etc
4) Perfect knowledge- In a perfectly competitive market, the buyers are aware of the prevailing market price of the product at different places and the sellers are aware of the prices at which the buyers are willing to buy the product.
5) Perfect mobility of factors of productions- In a perfect competition the factors of production are perfectly mobile. Such mobility implies that there is optimum utilisation of the factors of production.
6) Absence of transport cost- In a perfect competition it is assumed that there is no transport cost. This further ensures that there is uniform price in the market.