Economics Monopolistic Competition Questions Medium
Monopolistic competition affects price and output differently compared to perfect competition. In perfect competition, there are many firms producing identical products, resulting in a situation where no single firm has control over the market. As a result, price and output are determined by the forces of supply and demand.
On the other hand, monopolistic competition is characterized by a large number of firms producing differentiated products. Each firm has some degree of market power, allowing them to have some control over the price of their product. This means that firms in monopolistic competition can set their prices above marginal cost, resulting in a higher price compared to perfect competition.
In terms of output, monopolistic competition tends to result in a lower level of output compared to perfect competition. This is because firms in monopolistic competition face downward-sloping demand curves due to product differentiation. As a result, they produce less output to maximize their profits at the given price level.
Overall, monopolistic competition leads to higher prices and lower output compared to perfect competition due to the presence of product differentiation and market power.