hi everybody jacob reed here from reviewecon.com today we're going to be talking about imperfect competition if after watching this video you still need a little more help head over to revieweecon.com and pick up the total review booklet it has everything you need to know to ace your microeconomics and macro economics exams let's get into the content now in unit 2 you learned all about perfectly competitive markets that's the supply and demand craft and in unit 3 you learned about perfectly competitive firms the individual businesses within a perfectly competitive market but the reality is that most markets are not perfectly competitive in fact most markets are imperfectly competitive so let's talk about the different types of imperfectly competitive markets the first type is a monopoly that's where one business dominates an entire market and that's the imperfectly competitive market that most people already know a little bit about but there are two other imperfectly competitive markets the first one of those is an oligopoly that is a market structure where just a few large firms dominate the market and the last and perfectly competitive market is the market structure most businesses find themselves competing within that is monopolistic competition that's a market structure where there's lots of businesses that differentiate their products and have lots of competition now since this video is an introduction to imperfect competition we're going to talk about each of these three imperfectly competitive markets briefly so first we're going to talk about monopolistic competition here as i said we have many sellers within this market we are also going to have low barriers to entry as well that means it is relatively easy to enter or exit this market and it is because of those low barriers to entry that firms within this market structure are going to earn zero economic profit within the long run monopolistically competitive firms have that in common with perfectly competitive firms because when there's economic profit firms are going to enter the market and compete that profit away and when there are economic losses firms are going to exit the market and as a result firms are going to break even or earn zero economic profit or a normal profit in the long run the distinguishing factor between monopolistic competition and perfect competition is that products are different rather than identical like they are in a perfectly competitive market shoes are an example of a monopolistically competitive market products are differentiated but highly substitutable and it is that differentiation the difference between the products that gives these firms some pricing power that means they aren't price takers like perfectly competitive firms they are price seekers and have some influence on the price they charge the next imperfectly competitive market structure is an oligopoly here we have a few sellers dominating this market and the reason we only have a few sellers dominating this market is because barriers to entry are extremely high that means it is difficult for firms to enter this market and compete various entry include things like high startup costs government regulations and established customer loyalty and for oligopolies it is those high barriers to entry that give them pricing power the last and perfectly competitive market is a monopoly in fact it's the least competitive of markets in a monopoly just one seller dominates the market and barriers to entry are so high that it is impossible for any firms to enter this market and compete if a competitor does enter the market and break through those barriers to entry then the market is no longer a monopoly but an oligopoly instead in a monopoly the product is unique that means there are no close substitutes to compete with and for a monopoly it is those high barriers to entry and the uniqueness of the good that give this firm pricing power in fact another term for pricing power is monopoly power and that's because monopolies have so much of it next we're going to talk about the demand curves that firms face within imperfect competition and we're going to compare it to the demand curve that perfectly competitive firms face so as we know perfectly competitive firms are price takers and that's because the market supply and demand set the equilibrium price and that is the price that the firm gets for all units of output they can produce that means the firm within a perfectly competitive market is going to have a horizontal demand and marginal revenue curve if a perfectly competitive firm increases the price above the equilibrium price from the market they will sell zero units of output if a perfectly competitive firm decided to lower their price below the market equilibrium they will still sell as much as they can produce and lose profit as a result imperfectly competitive firms on the other hand are price seekers and they have a typical downward sloping demand curve which means as they increase the price they will sell fewer units of output and if they decrease the price they will sell more units of output so given the downward sloping demand curve we just saw we know that a firm in an imperfectly competitive market must lower the price if they wish to sell more units of output and that gives us a different relationship between the demand curve and the marginal revenue curve for an imperfectly competitive firm let's take a look at this table here showing the different units of output and the different prices that an imperfectly competitive firm can charge this firm can sell one unit of output at a price of ten dollars that means the total revenue is going to be ten dollars and the marginal revenue is going to be ten dollars for that first unit of output but if this firm wants to increase production to two units of output they are going to have to lower the price to nine dollars that means the total revenue is now eighteen dollars and the marginal revenue or the change in the total revenue is only eight dollars so that marginal revenue is now below the price if this firm wants to sell a third unit of output they have to lower the price to eight dollars that makes our total revenue 24 for those three units and that makes our marginal revenue just six dollars and so once again the marginal revenue is below the price and if we graph this out the quantity and price are our demand curve but the quantity graphed with the marginal revenue is our marginal revenue curve and since the marginal revenue is less than the price that means marginal revenue is going to be below the demand curve and this is what it looks like on the graph we've got our downward sloping demand curve with a marginal revenue curve below the demand it's technically twice the slope as the demand curve so when you draw these graphs make sure you put marginal revenue below the demand next we're going to talk about efficiency for imperfectly competitive markets if you remember back to perfectly competitive firms they are going to price at marginal cost they produce where mr equals mc and at that quantity the price is equal to the marginal cost that means this firm is allocatively efficient they're producing where the marginal cost equals the marginal benefit the marginal benefit is the demand curve here now if we take a look at that demand and marginal revenue curve we just saw and add in the marginal cost curve that you learned in unit 3 we can determine if an imperfectly competitive firm is going to be efficient or not just like with perfectly competitive firms an imperfectly competitive firm is going to produce where mr equals mc here though they're going to price up at the demand curve and since the price is above the marginal cost at this profit maximizing quantity this firm is not allocatively efficient they are under producing and overcharging the allocatively efficient quantity here is where the marginal cost intersects the demand curve and since we aren't producing the allocatively efficient quantity we have deadweight loss and there you have it that is an introduction to imperfectly competitive markets you're going to learn about all three of these market structures more in the rest of this unit if you still need a little more help head over to reviewecon.com and pick up that total review booklet it has everything you need to know to ace your microeconomics or macroeconomics exams that's it for now i'll see you all next time