Perfect and monopolistic competition

what are some qualities of perfect competition

• many firms

• identical products

• unrestricted entry

how common is perfect competition

very rare since it’s an extreme case

name some barriers to entry and exit

• economies of scale

• legal protections

• brand loyalty

• ownership of resources

• mergers

• long term contracts

how is economies of scale a barrier to entry

it may be more cost effective to have a large firm, therefore it is difficult to initially set one up

how is legal protection a barrier to entry

many industries require licenses or permits in order to trade, which can be expensive and lengthy to require

how is brand loyalty a barrier to entry

consumers may be reluctant to try new products

how are mergers a barrier to entry

larger firms may purchase new, smaller firms to dominate the market

how is ownership of resources a barrier to entry

established firms may control access to necessary materials

how is a firm considered small in economics

if they are unable to influence the market price

explain the process of profits being eroded away

• firms will see profit can be made

• many new firms will join the industry

• supply of goods increases

• the price that firms can charge gets pushed down

explain the qualities of monopolistic competition

• firms have the ability to differentiate themselves

• more influence over charging price- firms are no longer price takers

• the demand function is now downward sloping

• unrestricted entry

what is the demand function for perfect competition

a horizontal line

what is the demand function for monopolistic competition

downward sloping