Final answer:
The key difference between monopolistically competitive firms and monopolies is in their demand curves and pricing power. Monopolistically competitive firms have a downward-sloping demand curve with limited pricing power, whereas monopolies face the market demand curve and can set prices constrained only by market demand.
Step-by-step explanation:
The primary difference between a monopolistically competitive firm and a monopoly lies in their ability to set prices and the nature of their demand curves. A monopolistically competitive firm operates in a market with many firms offering differentiated products, resulting in a downward-sloping, but not flat, demand curve. This firm has some degree of market power to set prices above marginal cost, but its power is limited by the close substitutes available.
In contrast, a monopoly represents a market with a single firm and no close substitutes for its product, granting it substantial market power. Because the monopolist is the sole provider, its demand curve is the market demand curve, which is downward-sloping. Thus, the monopolist can set prices, but these are constrained by overall market demand, meaning the firm can charge any price as long as it corresponds with the quantity consumers are willing to buy at that price. Unlike perfect competitors who are price takers, a monopolist has more leeway to set its price, subject to demand.