Theory question 111
Market StructuresSection B (answer four questions only from this section)
Distinguish between a perfect market and a monopolistic market.
Show the model answer
Perfect market: very many buyers and sellers; monopolistic market: one seller (or a few sellers with differentiated products).
Perfect market: products are identical (homogeneous); monopolistic: product has no close substitutes or is differentiated.
Perfect market: free entry and exit; monopolistic: barriers to entry.
Perfect market: firm is a price taker; monopolist is a price maker.
Perfect market: perfect knowledge; monopolistic: imperfect knowledge.
Perfect market: demand curve facing the firm is horizontal (AR = MR); monopolistic: downward sloping (MR below AR).
Perfect market: only normal profit in the long run; monopolist can earn abnormal profit in the long run.
Price discrimination and advertising are possible in a monopolistic market but not in a perfect market.
Set out the differences point against point.