MARKET POWER
● It is important because it gives rise to market failure or not being able to achieve
allocative efficiency.
● Competition occurs when there are many buyers and sellers acting independently, so
that no one has the ability to influence the price of a product, and competition brings
efficiency.
● The greater the market power, the lower the competition and the greater the control
over price.
Perfect competition
● price takers
● zero market power
● large number of firms are in the industry
● they make normal profit
● their product is homogenous, meaning that they’re undifferentiated, identical and
there are no brand names
● no barriers to entry, so new firms are free to enter the industry
● highly unrealistic
● each firm is small relative to the total number of firms, so that no one has the ability
to influence the price
● examples : agricultural commodities (wheat, rice etc.), silver, gold
● demand curve is horizontal (perfectly elastic)
● there are close substitutes
● only perfect competition can achieve allocative efficiency
Monopoly
● price makers
● full market power
● single firms is the industry or single firm dominates the industry
● unique good with no close substitutes
● high barriers to entry
● significant control over price
● demand curve is inelastic
● abnormal profit in the long run
● no competition
● allocative inefficiency
● examples : electricity, telephone, water companies
Monopolistic competition
● large number of small to medium sized firms
● no barriers to entry
● product differentiation : firms try to make their product different from the others by
quality, servicing or packaging
, ● differs from perfect competition mainly because product differentiation
● the existence of similar products limits their degree of power to control the market
prices
● examples : shoes (Nike, Adidas, Puma, Reebok etc.), detergent, computer, publishing,
furniture, restaurant
● high competition
● demand curve is elastic
● they have some market power
● normal profit in the long run
Oligopoly
● small number of large firms
● products may be differentiated (cars) or undifferentiated (oil)
● high barriers to entry
● significant control over price
● high market power
● abnormal profit in the long run
● strategic interdependence : actions of one firm affect the others
● incentive to collude and compete
● game theory
○ incentive to cheat
● non price competition : because of the price wars > they hold prices relatively stable
they may act like monopolies : collude fixing prices and fixing quantity
● formal collusive monopolies (cartel)
agreement between firms either for prices or quantity (oil petrolium exporting govt)
they restrict the quantity to sell it for higher
● informal collusive monopolies (illegal)
no agreement between firms for price and quantity
high incentive to cheat
unfair competition advantage
Revenues
They are the payments firms receive when they sell the goods and services they produce.
Total Revenue (TR) = PxQ (the total sales of a firm calculated as the number of goods sold
divided by the price of those goods)
Average Revenue = TR/Q (always equal to P) (revenue per unit sold)
Marginal Revenue = change in TR / change in Q (additional revenue arising from the sale of
an additional unit of output)
, Different types of markets & revenues
● the firm is unable to control price, it is constant as output varies : perfect competition
● the firm has control over price, price varies with output : monopoly, monopolistic
competition, oligopoly
Cost of production : payments by firms to obtain and use factors of production in their
production process
● Economic costs (implicit + explicit costs)
When the firm uses resources it does not own, it buys them from outsiders and makes
payments of money to the resource suppliers. For example, a firm hires labour and pays a
wage; it purchases materials and pays the price to the seller. Such payments made by a firm to
outsiders to acquire resources for use in production are known as explicit costs.
On the other hand, when the firm uses resources it owns, there is still a cost, which consists
of the income that is sacrificed when the firm uses such a self-owned resource. For example,
in the case of an office building owned and used by the firm, the cost is the rental income that
● It is important because it gives rise to market failure or not being able to achieve
allocative efficiency.
● Competition occurs when there are many buyers and sellers acting independently, so
that no one has the ability to influence the price of a product, and competition brings
efficiency.
● The greater the market power, the lower the competition and the greater the control
over price.
Perfect competition
● price takers
● zero market power
● large number of firms are in the industry
● they make normal profit
● their product is homogenous, meaning that they’re undifferentiated, identical and
there are no brand names
● no barriers to entry, so new firms are free to enter the industry
● highly unrealistic
● each firm is small relative to the total number of firms, so that no one has the ability
to influence the price
● examples : agricultural commodities (wheat, rice etc.), silver, gold
● demand curve is horizontal (perfectly elastic)
● there are close substitutes
● only perfect competition can achieve allocative efficiency
Monopoly
● price makers
● full market power
● single firms is the industry or single firm dominates the industry
● unique good with no close substitutes
● high barriers to entry
● significant control over price
● demand curve is inelastic
● abnormal profit in the long run
● no competition
● allocative inefficiency
● examples : electricity, telephone, water companies
Monopolistic competition
● large number of small to medium sized firms
● no barriers to entry
● product differentiation : firms try to make their product different from the others by
quality, servicing or packaging
, ● differs from perfect competition mainly because product differentiation
● the existence of similar products limits their degree of power to control the market
prices
● examples : shoes (Nike, Adidas, Puma, Reebok etc.), detergent, computer, publishing,
furniture, restaurant
● high competition
● demand curve is elastic
● they have some market power
● normal profit in the long run
Oligopoly
● small number of large firms
● products may be differentiated (cars) or undifferentiated (oil)
● high barriers to entry
● significant control over price
● high market power
● abnormal profit in the long run
● strategic interdependence : actions of one firm affect the others
● incentive to collude and compete
● game theory
○ incentive to cheat
● non price competition : because of the price wars > they hold prices relatively stable
they may act like monopolies : collude fixing prices and fixing quantity
● formal collusive monopolies (cartel)
agreement between firms either for prices or quantity (oil petrolium exporting govt)
they restrict the quantity to sell it for higher
● informal collusive monopolies (illegal)
no agreement between firms for price and quantity
high incentive to cheat
unfair competition advantage
Revenues
They are the payments firms receive when they sell the goods and services they produce.
Total Revenue (TR) = PxQ (the total sales of a firm calculated as the number of goods sold
divided by the price of those goods)
Average Revenue = TR/Q (always equal to P) (revenue per unit sold)
Marginal Revenue = change in TR / change in Q (additional revenue arising from the sale of
an additional unit of output)
, Different types of markets & revenues
● the firm is unable to control price, it is constant as output varies : perfect competition
● the firm has control over price, price varies with output : monopoly, monopolistic
competition, oligopoly
Cost of production : payments by firms to obtain and use factors of production in their
production process
● Economic costs (implicit + explicit costs)
When the firm uses resources it does not own, it buys them from outsiders and makes
payments of money to the resource suppliers. For example, a firm hires labour and pays a
wage; it purchases materials and pays the price to the seller. Such payments made by a firm to
outsiders to acquire resources for use in production are known as explicit costs.
On the other hand, when the firm uses resources it owns, there is still a cost, which consists
of the income that is sacrificed when the firm uses such a self-owned resource. For example,
in the case of an office building owned and used by the firm, the cost is the rental income that
