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Chapter 13: Problem 1

What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

Short Answer

Expert verified
Perfectly competitive markets are characterized by numerous participants, identical products, perfect information, and freedom of entry and exit, such as in the case of commodities like wheat or milk. On the other hand, monopolistically competitive markets have differentiated products, and each firm makes a product that is slightly different from the products of competing firms. Examples include restaurants, clothing, and books.

Step by step solution

01

Define Perfectly Competitive Markets

Perfectly competitive markets are characterized by numerous participants, homogenous products, perfect information and freedom of entry and exit in the market. This means products are identical, everyone in the market has access to the same information and firms can enter or leave the market freely.
02

Give Examples of Perfectly Competitive Markets

Examples of products sold in perfectly competitive markets include commodities like wheat or milk. They are homogenous across sellers and prices are driven by supply and demand.
03

Define Monopolistically Competitive Markets

Monopolistically competitive markets share features with perfectly competitive markets but differ in that products are differentiated rather than identical. Each firm makes a product that is slightly different from the products of competing firms.
04

Give Examples of Monopolistically Competitive Markets

Examples of products sold in monopolistically competitive markets include restaurants, clothing, and books. Each product is unique and different from others, therefore each business can set its own prices.

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Most popular questions from this chapter

If Daniel sells 350 hamburgers at a price of \(\$ 3.25\) each, and his average cost of producing 350 hamburgers is \(\$ 3.00\) each, what is his profit?

Draw a graph that shows the effect on a firm's profit when it increases spending on advertising but the increased advertising has no effect on the demand for the firm's product.

In \(2016,\) Howard Shultz announced that he would step down as CEO of Starbucks to establish luxury coffee shops that would charge as much as \(\$ 12\) for a cup of coffee. Although some analysts questioned whether many consumers would be willing to pay such high prices for coffee, Erich Joachimsthaler, an executive at a brand-strategy consulting firm, believes the projects could be successful. Joachimsthaler compared the market for coffee to the market for beer, which has experienced competition from small craft breweries. "They [established companies such as Coors and Anheuser-Busch InBev] never protected themselves from the high end.... I think Starbucks sees that the middle is slowing down." a. Briefly explain what Joachimsthaler means by the "high end" and "the middle is slowing down." What relevance do his observations have for the success of Schultz's project? b. Briefly explain whether Schultz establishing luxury coffee shops illustrates: • Product differentiation • Marketing • Brand management

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Why doesn't a monopolistically competitive firm produce where \(P=M C\), as a perfectly competitive firm does?
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