Perfect vs.

Monopolistic Competition Regina Cisneros

1. Note down the key characteristics / assumptions of perfect competition:

- All sellers make a homogenous product.
- Sellers are price takers
- Easy market entry and exit
- A large number of buyers and sellers

2. Note down the key characteristics / assumptions of monopolistic competition:

- Product differentiation
- Fairly easy market entry and exit
- Sellers have some control over product prices
- A relatively large number of sellers in the market

3. Draw a market diagram and an individual firm diagram in the space below, showing perfect
competition in the short run (assume that the firm is making economic profits in the short run):

4. Draw a market diagram and an individual firm diagram in the space below, showing monopolistic
competition in the short run (assume that the firm is making economic profits in the short run):
6. What is the meaning of allocative and productive efficiency? Compare the allocative and
productive efficiency of a perfectly competitive market with a monopolistically competitive
market.
- Allocative efficiency is when goods and services are distributed in a way that aligns with
consumer demands and marginal benefits equal margins costs.
- Productive efficiency is when resources are maximized so output can be produced at the lowest
average total cost possible.
- A perfectly competitive market has productive and allocative efficiency in the long run while a
monopolistically competitive market has neither allocative efficiency nor productive
efficiency.