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

Answer -

1 - The perfectly competitive firm is the price taker and cannot influence the price on its own whereas other markets can influence it by price discrimination.

2 - Perfectly competitive market sells only the homogenous products whereas other markets sell differentiated products or the products with no substitutes

3- Competitive firm only earns normal profits at only produces at MR = MC whereas inperfect firms charge the price above MR and earn economic profits.

4 - There is no market power in competitive market with the firm whereas some market power is there in monopolistic and complete market power is there in monopoly.

5 - Perfect competition does not lead to inefficiency and deadweight losses whereas there are inefficiencies and deadweight losses in imperfect firms.

6 - Competitive market maximises both , consumer and producer surplus and is most beneficial to society unlike imperfect firms which decrease the consumer surplus.