To sell quantity Q 3 it would have to reduce the price to P 3. If it wants to increase its output to Q 2 units-and sell that quantity-it must reduce its price to P 2. Suppose, for example, that a monopoly firm can sell quantity Q 1 units at a price P 1 in Panel (b). But, unlike the perfectly competitive firm, which can sell all it wants at the going market price, a monopolist can sell a greater quantity only by cutting its price. Because it is the only supplier in the industry, the monopolist faces the downward-sloping market demand curve alone. The perfectly competitive firm, by contrast, can sell any quantity it wants at the market price.Ĭontrast the situation shown in Panel (a) with the one faced by the monopoly firm in Panel (b). The monopoly firm can sell additional units only by lowering price.
Once it determines that quantity, however, the price at which it can sell that output is found from the demand curve. As a profit maximizer, it determines its profit-maximizing output. In Panel (b) a monopoly faces a downward-sloping market demand curve. A typical firm with marginal cost curve MC is a price taker, choosing to produce quantity q at the equilibrium price P. Panel (a) shows the determination of equilibrium price and output in a perfectly competitive market. Each firm in a perfectly competitive industry faces a horizontal demand curve defined by the market price.įigure 10.2 Perfect Competition Versus Monopoly In the perfectly competitive model, one firm has nothing to do with the determination of the market price. Notice the break in the horizontal axis indicating that the quantity produced by a single firm is a trivially small fraction of the whole. The marginal cost curve, MC, for a single firm is illustrated.
Those, in turn, consist of the portions of marginal cost curves that lie above the average variable cost curves. The market supply curve is found simply by summing the supply curves of individual firms. In Panel (a), the equilibrium price for a perfectly competitive firm is determined by the intersection of the demand and supply curves. Figure 10.2 "Perfect Competition Versus Monopoly" compares the demand situations faced by a monopoly and a perfectly competitive firm. When this is the case, buyers have a difficult time comparing the products, and so may pay too much for them.Because a monopoly firm has its market all to itself, it faces the market demand curve. An imperfect market can exist when competing products contain different features. The stock market can be considered an imperfect market, since investors do not always have immediate access to the most recent information about the issuers of securities.ĭiffering product features. The reverse situation can also occur, where a government imposes such high regulatory barriers that few companies are allowed to compete (see the preceding monopoly and oligopoly discussion).
When this happens, an excessive quantity is purchased. Governments may intervene in a market, usually to set prices below the actual market level (such as by subsidizing the price of oil). The same situation arises in an oligopoly, where there are so few competitors that there is no point in competing on price. An organization could have established a monopoly, so it can charge prices that would normally be considered too high. Here are several examples of imperfect markets: This may be monopoly owners who profit from excessively high prices, investors who buy or sell securities based on insider information, or buyers who engage in arbitrage to buy goods at artificially low prices and sell them elsewhere at higher prices. The usual effect of an imperfect market is that astute traders take advantage of the situation.
All markets are imperfect to some degree. An imperfect market is an environment in which all parties do not have complete information, and in which participants can influence prices.