What are the differences/similarities between perfect competition and monopolistic competition?

Economists can predict and describe the nature of a firm based upon its existing size, structure, behaviour and relationship to other firms (market power). This is known as theory of the firm. Two possible market structures that a firm may belong to are perfect competition and monopolistic competition (there are also oligopolies and monopolies).


Perfect competition exists when an industry consists of an infinite amount (in reality a very large number) of firms. There are a number of assumptions that accompany a perfectly competitive market:

1) Each individual firm has no market power

- Firms are too small, relative to the whole industry, to have a noticeable effect on the output of the whole industry by altering its own output.

- The firm cannot affect the supply curve of the industry so it can’t affect the price of the product


2) The firm is a price-taker

- Meaning, the firm has to sell at whatever price is set by the demand and supply in the industry as a whole


3) Firms produce homogenous goods (identical).

- Not possible to distinguish between goods produced by different firms

ie. No brand names or marketing


4) There are no barriers to entry/exit.

- Firms are completely free to enter or leave the industry as they wish

ie. No costs or legal barriers


5) All producers/ consumers possess perfect knowledge of the market

ie. Prices, costs, quality of products, availability, etc.


In real life, the closest industry to representing perfect competition is the agricultural market.

ie. Wheat production in Europe


Monopolistic competition exists if an industry has a fairly large number of firms present (albeit, fewer firms than in perfect competition). The assumptions that underlie a market in monopolistic competition are:

1) The firm has some price-setting ability

- Firms are still relatively small compared to the industry, so actions of one firm are unlikely to have a great effect on its competitors.

- Firms act independently of each other


2) It is possible to slightly differentiate between products.

- Firms produce slightly different products from each other, so the consumer has choice.


3) There are no barriers to entry/exit

-Firms are free to enter or leave the industry


4) Producers/consumers have almost perfect knowledge of the industry


There exist a number of real life examples of markets in monopolistic competition, for example: nail salons, restaurants, car mechanics, etc.


There are additionally similarities and differences in the profit abilities and efficiency of each market type:


In both perfect competition and monopolistic competition, firms in the industry are profit maximisers. A firm is only able to make normal (zero economic) profits in the long run, but can make short-run abnormal profits or losses.


In perfect competition, a firm achieves both allocative and productive efficiency in the long run. Consumers pay lower prices than in monopolistic competition, as they are only able to purchase homogenous products.


In monopolistic competition, a firm never achieves allocative or productive efficiency as consumers are willing to pay a slightly higher price in order to have differentiated products (choice). 

Olivia J. IB Economics tutor, A Level Economics tutor, GCSE Economics...

2 years ago

Answered by Olivia, an IB Economics tutor with MyTutor

Still stuck? Get one-to-one help from a personally interviewed subject specialist


Gabriela S. GCSE Maths tutor, IB Maths tutor, IB Economics tutor, IB ...
View profile
£20 /hr

Gabriela S.

Degree: Economics (Bachelors) - Durham University

Subjects offered: Economics, Maths+ 2 more


“About Me I’m an economics student at Durham University. I love learning new things, teaching them to other people and trying to make everything as interesting and understandable as possible! I really enjoy everything related to econom...”

PremiumAdam D. GCSE Maths tutor, A Level Economics tutor, A Level Maths tutor
View profile
£30 /hr

Adam D.

Degree: Economics and Management (Bachelors) - Bristol University

Subjects offered: Economics, Maths


“I am a second year undergraduate student at the University of Bristol, studying Economics and Management. I achieved A* in Economics and Maths A-levels and an A* at maths GCSE so would be very happy to help any students who are studyi...”

Jay L. A Level Art tutor, GCSE Art tutor, A Level Chemistry tutor, GC...
View profile
£20 /hr

Jay L.

Degree: Mathematics, Operational Research, Statistics and Economics (MORSE) (Bachelors) - Warwick University

Subjects offered: Economics, Maths+ 4 more

Further Mathematics
-Personal Statements-

“Hi! I am currently a fresher at the University of Warwick, studying Maths, Operational Research, Statistics and Economics, or MORSE. I have always enjoyed the challenge of maths and would really like to help you experience joy and sa...”

About the author

Olivia J. IB Economics tutor, A Level Economics tutor, GCSE Economics...
View profile

Olivia J.

Currently unavailable:

Degree: Economics (Bachelors) - Exeter University

Subjects offered: Economics, Maths+ 1 more

-Personal Statements-

“Second year Economics student at Exeter University, passionate about the subject and looking to tutor IB and A-level students ”

You may also like...

Other IB Economics questions

How does GDP perform as an indicator of economic welfare?

Explain one reason why governments impose indirect taxes.

What are externalities?

What is the law of demand?

View IB Economics tutors


We use cookies to improve our service. By continuing to use this website, we'll assume that you're OK with this. Dismiss