perfect competition does not apply in two instances. What would suggest that the firms are not...

perfect competition does not apply in two instances. What would suggest that the firms are not perfectly competitive? What would be lost from studying these industries using only supply and demand analysis?

Expert Solution

When firms are perfectly competitive no single firm is able to influence the market outcome. Also each firm earns zero economic profit in the long run. The implication is that output produced is at its maximum efficieny (minimum efficient scale) and the price charge is lowest.

Oligopolies and Monopolies are the two instances where markets are imperfect and firms produce less than what they produce in competition. The price charged is very high than marginal cost and this gives them an opportunity to earn economic profit in long run.

So a price increase and a quantity reduction as a result of market power suggest that the firms are not perfectly competitive. If these industries are studied using only supply and demand analysis, then we would not be able to get a clear picture of market. Perhaps monopolies and oligopolies have no supply function and each firm under oligopoly has a different demand faced by it.

We then identify incorrect market details if we use demand and supply analysis in case of imperfect competition.

Rahul Sunny answered 1 year ago

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