Question

Identify the conditions under which a firm operates as perfectly competitive, monopolistically competitive, or a monopoly.

Short answer

The condition includes the number of sellers and buyers, information availability, and entry-exit of the firms.

Step-by-step solution

Conditions under Perfect Competition

1. There are many firms and buyers in the respective market and are considerably smaller in size as compared to the market.
2. The consecutive firms are producing identical commodities.
3. Both sellers and buyers have relevant information available which is also termed perfect information availability.
4. There are no problems regarding transaction costs.
5. The firms are free to enter and exit the market.
6. For profit maximization under perfect competition price must be equal to marginal cost and marginal revenue of the firm.

Monopolistic Competition

1. Under this market, there are many firms that are not quite large.
2. The firms can freely enter and exit the market at any time.
3. All the firms produce different commodities which are not identical in any form.
4. Long run equilibrium takes place when the long-run marginal costs equal the marginal revenue.

Conditions under Monopoly

1. There is one considerably large operating firm amongst negligible ones.
2. Presence of no close substitutes available in the market acting as a competitor of the commodity concerned.
3. High barrier to entry in the market through limited accessibility of resources to the entrant, followed by huge start-up cost to be borne by the firm to compete for the monopoly.
4. Maximization of profit is attained when the marginal revenue of the firm is equal to the marginal cost of the firm.