Economics Perfect Competition and Monopolistic Competition

1a) Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. In perfect competition, there are a large number of firms in the industry. The firms in this industry are price takers as they sell at whatever price is set by demand and supply in the industry as a whole. All the firms produce homogeneous products which are exactly identical; it is impossible to distinguish between a good produced in one firm and a good produced in another firm. There are no barriers to entry or exit ; firms can enter or exit the market when they want to, however they don't have ability to stop new firms from entering and old firms from leaving the industry. Producers and consumers have perfect knowledge of the market i.e. the producers are fully aware of market prices, cost in the industry, and the workings of the market and the consumers are fully aware of prices in the market, the quality of the products, and the availability of the goods. Monopolistic competition is a market structure with many competed firms and each firm has a little bit of market power to set prices. The industry is made up of large number of firms and each firm is able to set prices and therefore it has a downward sloping demand curve. There is free entry and exit of firms in response to profits in the industry. Each firm produces a product that is differentiated from all other products produced by the other firms in the industry and it is possible for consumers to tell one firm's product from another. Gaining abnormal profits is possible in short run but not in long run in the monopolistic competition market

3) In monopolistic competition Marginal Curve (MC) is below the Average Revenue curve (AR). Consumers have more additional benefit than the additional cost of production. Not allocatively efficient
Monopolistic Competition Firms may not produce at the lowest possible cost (not productively efficient), but society gets a variety in return. Monopolistic competitive industry is made up of a fairly large number of firms. In relation to the size of the Industry, monopolistic competitive firms are small. They produce slightly differentiated products, for example by brand name, color, design and quality of service. A firm in monopolistic competition has a downward sloping demand curve, since they are price-makers, which means that they are influential enough to affect the price of their product. The demand curve is relatively elastic because of the many substitutes (which are slightly different). A monopolistic competitive firm is able to gain abnormal profits in the short run. In this case the firm is maximizing profits by producing at the level of output where MC=MR. On the diagram below, q1 represents the productively efficient level. Productive efficiency is achieved when the marginal cost is at the lowest average total Cost. This means a productively efficient firm utilizes all its resources and produces at the lowest cost possible. A monopolistic competitive firm is allocatively efficient when the marginal cost curve intersect the average revenue curve. This is because the price consumers are willing to pay equals to the marginal utility they receive. So a firm is allocatively efficient when there is an optimal distribution of the product. It's also called the socially optimum level of output. In this case, when a firm in monopolistic competition is earning abnormal profits, it is neither productively efficient, nor allocatively efficient. This is because the firm produces where marginal costs is equal to the marginal revenue, as opposed to the points of productive and allocatively efficiency which are located differently.