Assignment Example | Topics and Well Written Essays - 500 words - 178

Assignment Example 2. Monopolistic competition is a term used to refer to that state of a market in which there are several buyers of a product or services, but the number of sellers of that product or service is low and these suppliers differentiate their goods and services on the basis of differentiation technique (Hall 321). In a monopoly there is only one supplier, while in monopolistic competition there is more than one seller. In monopoly there is no competition taking place, but in monopolistic competition firms compete against each other. The barriers to entry in monopolistic competition are lower than that of a monopoly. 3. Firms that operate in under the state of monopolistic competition experience both productive as well as allocative inefficiency. They experience productive inefficiency because they produce at a level that is lower than the level of MR (Marginal Revenue) is equal to MC (Marginal Cost) (Hall 324). This means that they experience productive inefficiency because they produce less than the amount of goods and services demanded in order to increase their profitability. They experience allocative inefficiency because they have more capacity to produce goods and services and they are involved in the process of producing lesser goods and services as compared to their capacity. 4. Firms that fall in the category of either monopolistic competition or firms that are even recognized to be operating in a state of imperfect competition are involved in producing lesser goods and services than the amount of goods and services they can actually produce and this situation has been regarded by economists as excess capacity (Hall 325). In monopolistic competition, organizations compete on the basis of differentiation and target specific consumers while firms in this form of competition produce similar kinds of goods and services. In order to target a few and charge premium prices they produce less than what the overall