Compare and contrast perfect competition and monopolistic competition Essay

Compare and contrast perfect competition and monopolistic competition. Also Explain how equilibrium is determined in the Keynesian Income Expenditure - Essay Example nother very important characteristic of the Monopolistic competition is that each firm tries to create difference in its product from the other by advertising, propaganda, attractive packing, nice smile, etc. The entry of new firms in the monopolistically competition industry is relatively easy. There are no barriers of new firms to enter the product group or leave the industry in the long run. In perfect competition model, it was assumed that there was large number of firms producing homogenous product. In the case of monopoly, there was only one seller of a product. Both these models were thus polar extremes and were considered satisfactory for the market price analysis in economic theory. Under perfect competition, the demand curve which an individual seller has to face is perfectly elastic, i.e. it runs parallel to the base axis. The competitive seller being unable to affect the market price sells its output at the prevailing market price. Hence marginal revenue equals the price of the product. The average-revenue is identical to its marginal revenue. Thus under perfect competition MR=AR=Price and the three curves coincide and are perfectly elastic. This is, however, not the case under monopoly. The monopolist is the sole supplier of a product in the market. He has full powers to make decisions about the pricing of his product. He is a price taker. If he lowers the unit price of his product, his’ sale is increased, if he raises the price, he will not lose his entire sale (Lawrence). The simple Keynesian income expenditure model builds two main suppositions: 1. Prices, incomes and the attention rate are all settled 2- production is demand determined –extra capability will be employed by firms to provide as a great deal output as clientele desire to