Imperfect Competition Characteristics of Imperfect Compeition Three types

Imperfect Competition

Characteristics of Imperfect Compeition Three types of Imperfect Competition 1. Monopolistic Competition 2. Oligopoly 3. Monopoly Charictaristics 1. number of competitors 2. types of products 3. price control 4. barriers to entry 5. long-run profit

Characteristics Perfect Competition Monopolistic Competition Oligopoly Monopoly Many – Thousands Many (4 largest firms control less than 40% of the market) Few (4 largest firms control more than 40% of market share) 1 Types of producs Identical Differentiated (brand names) Identical OR differentiated No close substitutes Barriers to Entry No No Yes None limited Significant 100% $0 $0 Positive long run profit is possible Positive LR Profit Number of Competitors Price Control Long Run Profit

Competition Continuum

Examples

Two things influence your ability to control the price of your product.

• NO competitors • Product doesn’t matter • Lots of • Fewer competitors • all products are • Products are identical different

Barriers to entry will determine if you make economic profit.

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Price Makers – • All imperfectly competitive firms have some control over price • Demand Curve is downward sloping • Firms control price because of: • Type of product • Amount of competition

BLUE shows characteristics that determine the amount of price control a firm has. Characteristics Perfect Competition Monopolistic Competition Oligopoly Monopoly Many – Thousands Many Few 1 Types of producs Identical Differentiated (brand names) Identical OR differentiated No close substitutes Barriers to Entry No No Yes None limited Significant 100% $0 $0 Positive long run profit is possible Positive LR Profit Number of Competitors Price Control Long Run Profit

The Only Ice Cream Shop in Town

The Only Ice Cream Shop in Town For all imperfectly competative firms: • Demand curve is downward sloping • MR is below Demand Price is always greater than MR • You can charge $10 – limited sales • To sell more -- lower price • TR increases BUT MR decreases

The Only Ice Cream Shop in Town Notice at a quantity of 6 --MR goes below $0 This is also where TR begins to decrease

Determine which type of competition each characteristic describes. Identical Products Price Taker Price Maker MR =P=AR=D Differentiated Products D greater than MR

In Summary

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Efficiency Allocative Efficiency • P = MC • Price = value of land labor and capital it took to produce it Productive Efficiency • P = min ATC • The least costly production techniques are used

Perfectly Competative firms are efficient • Productive Efficiency – P = min ATC • Allocative Efficiency – P = MC

Imperfect Competition is inefficient • • Barriers to entry means competition is limited Price control means firms determine their own price No cause for price to decrease No cause to meet the two efficiency tests

Three characteristics of imperfect competition lead to inefficient outcomes.

Imperfect Competition Graph • Firm will produce where MC = MR so production = 5

Imperfect Competition Graph • Firm will produce where MC = MR so production = 5 • Product will sell for $6 Decide if this firm is efficient Does P = MC? NO – Price is greater than MC Does P = min ATC? NO – Price is greater than min ATC THEREFORE – Imperfectly competative firms do not meet the definition of efficiency

Is this firm efficient? Firm A produces agricultural products and has thousands of competitors. Its market sees no barriers to entry. Firms must accept the market price and produce as much quantity as is profitablt at that price. YES – firm A is efficient Firm B produces its own brand of a particular normal good. It only has 4 other competitors. Because of its size, new entries into the market are rare. Start-up costs are almost prohibitive. It can determine its own price. NO – firm B is not efficient

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