Overview
This lecture explains the differences between perfect and imperfect competition, focusing on how firms in imperfectly competitive markets face unique demand and marginal revenue curves.
Types of Market Structures
- Perfect competition has many firms producing identical products with no barriers to entry.
- Firms in perfect competition are price takers; market price equals marginal revenue.
- Monopoly exists when one firm dominates the market with significant entry barriers.
- Monopolistic competition features many firms with differentiated products and some entry barriers.
- Athletic shoe companies like Nike and Adidas are examples of monopolistic competition.
Demand and Marginal Revenue in Imperfect Competition
- In imperfect competition, each firm faces its own downward-sloping demand curve due to differentiation.
- Increasing production lowers the price for all units sold, not just the last one.
- Marginal revenue (MR) is less than price for additional units beyond the first.
- MR is calculated as the change in total revenue divided by the change in quantity.
- When price drops for all units sold, MR can be much lower than price, and may become negative if total revenue decreases.
- The MR curve in imperfect competition is downward sloping and steeper than the demand curve.
Comparing Marginal Revenue Curves
- In perfect competition, the MR curve is horizontal (equal to market price).
- In imperfect competition, the MR curve slopes downward faster than the demand curve due to price effects on all units sold.
Key Terms & Definitions
- Perfect Competition — market structure with many firms selling identical products and no barriers to entry.
- Imperfect Competition — market structures where firms have some control over price due to product differentiation or other factors.
- Monopolistic Competition — many firms compete with differentiated products and some barriers to entry.
- Monopoly — a single firm controls the entire market and faces the market demand curve.
- Marginal Revenue (MR) — the additional revenue gained from selling one more unit of a product.
- Demand Curve — shows the relationship between the quantity demanded and the price.
Action Items / Next Steps
- Practice calculating total and marginal revenue for firms in imperfect competition.
- Review the differences between demand and marginal revenue curves in various market structures.