Final answer:
Monopolistic competition differs from pure competition in that it involves many firms selling differentiated products, allowing for some price setting above marginal costs and resulting in markets with excess capacity and inefficiency.
Step-by-step explanation:
One difference between monopolistic competition and pure competition is the presence of differentiated products in monopolistic competition. Monopolistic competition is a market structure where many firms sell products that are similar but not identical. This differentiation might come from a variety of sources, such as the characteristics of the good or service, location from which the firm sells the product, intangible aspects, and consumer perceptions.
Unlike in pure competition, where firms are price takers selling identical products, in monopolistic competition, each firm has some degree of market power to set prices above marginal costs due to the unique aspects of their product. Therefore, the demand curve faced by a firm in monopolistic competition is more elastic than that of a monopoly but less so than in a perfectly competitive market. This elasticity reflects consumers' willingness to substitute similar products within the market.
Moreover, firms in monopolistic competition often operate with excess capacity and do not produce at minimum average total cost, leading to inefficiency, which contrasts with pure competition, where firms produce at optimal output levels with no excess capacity