What types of food are sold in restaurants? Besides your basic categories of Italian, Chinese, Indonesian, Mexican, French or American, you also have Fast Food, your basic diner, or elegant restaurants. What makes you go to one restaurant versus another? Even with the same basic ingredients and recipes, one restaurant is able to make their pasta, steak or hamburger taste better than the others. This is product differentiation and it is a crucial characteristic which defines a monopolistically competitive market. On the other hand a perfectly competitive market would be a farmers market. Many farmers bring their produce to the same location. This meets the first condition of a perfectly competitive market. The goods and services need to be identical to one another. Let's suppose you are looking for tomatoes at the farmers market. One tomato should be able to be substituted in for another. So that no farmer is able to offer a huge reduction in price.
This means farmers are equally aware of growing conditions, transportation costs, cost for rental of space to sell the product at the market, and Finally, if it is known that the price of tomatoes is high, other people need to be able to enter the market and sell tomatoes. In addition, Price and quantity are determining by all buyers and sellers as they interact in the market place. (Mankiw. N, 1997, p.62).
Monopolistic Competition contains elements of both perfect competition and monopolies. Monopolistic competition is a market that has many small firms selling products that are similar but not the same. It is a market structure that contains many firms, product differentiation, and ease of entry into the market. Which there are many sellers in this industry on the other words there are lots of competition, it's easy...