Question

Markets are separated into two broad categories based on their level of competition. On the one hand there are perfectly competitive markets and on the other hand, there are all other market structures which are grouped under imperfect competition. Markets under imperfect competition are generally described by fewer firms with each firm having some degree of market power depending on the number of firms in the market. Discuss the fundamental differences between perfect competition and imperfect competition (include a discussion of marginal revenue). In addition, discuss how the degree of market power effects the welfare of producers, consumers, and society. 20 Points

Answer 1

Following are the few fundamental differences between the perfect competition and imperfect competition:

• There are a large number of buyers and sellers in a perfectly competitive market but in the imperfectly market, the sellers are not as much as in the perfectly competitive market.
• The price is decided by the market in the perfectly competitive market and firms are price takers only. While in the imperfectly market, the firms have some degree of control over the price level. the firms can charge the monopoly price in few instances.
• There are no entry barriers in the perfectly competitive market, There might be few to larger entry barriers in the imperfectly competitive market.
• Products are homogenous in a perfectly competitive market, but in the imperfectly competitive market, product differentiation is marginal to a high level.

The perfectly competitive market tends to charge the low price and quantity is high, thus consumer surplus is very high and social welfare is maximized, While in the imperfectly competitive market, the monopoly power restricts the level of output and price level is high, so consumer surplus is minimized while the producer surplus is high relatively, thus social welfare is not maximized in the imperfectly competitive market.