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What Is Monopolistic Competition? Essay

634 words - 3 pages

Monopolistic competition is a form of economic competition in which there are many producers and many consumers in a given market, consumers have clearly defined preferences, the goods and services are heterogeneous, and there is freedom of entry. It harbors some characteristics of monopoly as well as some of perfect competition. A monopoly is defined as a persistent market situation where there is only one provider of a kind of product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of usable substitute goods. Perfect competition is a model in economic theory. It describes a hypothetical market form in which no producer or consumer has the market power to influence prices in the market. This would lead to an outcome which is efficient, according to the standard definition in economics. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand as well.As far as classifying market organizations, the characteristics that must be taken into consideration are number of firms in the market, type of product sold, ease of entering or leaving the industry, amount of information about the market, and degree of price control. These five characteristics mean that a given monopolistically competitive firm has a little bit of control over its small corner of the market. The large number of small firms, all producing nearly identical products, means that a very large number of close substitutes exists for the output produced by any given firm.Freedom of entry into and exit out of the industry means that capital and other resources are highly changeable and that any barriers to entry that might exist are few. These entry barriers allow real world firms to get and maintain above normal economic profit. The amount of information characteristic basically means that all firms operate on the same footing, that buyers know a lot about possible substitutes for...

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