Perfect and Imperfect Competition

Types of Competition and MR

• perfect competition

  • many sellers and buyers

  • Identical products/services sold

  • every seller and buyers knows what is being sold within the market (”perfect information”)

  • no barriers to entry/exit

  • price takers — follow the market price

• Monopolistic Competition

  • many firms

  • low barriers to entry

  • differentiated products

  • price makers

• Oligopoly

  • high barriers

  • few firms

  • products can be differentiated or identical

  • price makers

• Monopoly

  • one firm

  • price makers

  • unique products

  • very high barriers

• a firm that’s operating in an imperfectly competitive market has it’s own unique demand and mr curve— demand downward sloping & mr’s downward sloping is steep

MR & MC in Imperfect Competition

• MR < P

• MR curve lies below the demand curve

• the firm chooses output where MR = MC → then it uses the demand curve to find the highest price it can charge for that output level

• Because P > MR = MC, there’s a markup over cost

  • This leads to deadweight loss (inefficiency) compared to perfect competition

  • consumers pay more, and less is produced than in a competitive market