What are the main differences between Monopolistic Competition and Essay - 1

What are the main differences between Monopolistic Competition and Monopoly market structure Which of these market structures best serves the interest of the consumer and why - Essay Example The word, â€Å"Monopolist† is derived from the Greek words, Mono meaning one and Polist for seller (FRIEDMAN, Milton, 2002). The existence of Monopoly in today’s world is very rare. Monopolies are usually protected by effective barriers to entry. Example of Monopolies may be a company with its unique patented drug or the only provider of electricity for a town. De Beers used to have Monopoly in the diamond market. Monopoly does not have a complete control over price in a sense that it faces a negatively sloped demand curve. This means, any price increase will eventually loss some customers. Keeping in view, a Monopoly always wants to maximize its profit. For maximizing the profit, a Monopoly increases its output to the level where Marginal Cost (MC) intersects the Marginal Revenue (MR) as shown in the figure 1. The diagram shows the profit maximization point for a monopolist. The profit maximization point lies where Marginal Revenue = Marginal Cost. The economic profit is the difference between the Demand and ATC curve. If it produces less than 5 units, the economic profit will be reduced. Also, if the output is increased to 6, the economic profit will again reduce. A Monopolist will always strive for maximizing its profit. For a Monopolist, the Demand Curve is negatively slopped. If the demand for the product is less elastic, a Monopolist can fix a higher price. Ineleastic goods include those which are needs of human being such as electricity, sugar, wheat etc. However, if the demand is elastic, then a Monopolist should adjust the price to a certain level to gain maximum profit. Therefore, the price it charges is always greater than its MC. In Monopolistic competition, there are many competing firms which are selling differentiated products (Investopedia.com). Due to this fact, each firm faces highly elastic negatively sloped demand curve. The term â€Å"Differentiated Product† refers to those products which