Overview
This lecture introduces the dynamics of imperfect markets, focusing on different market structures and their cost and revenue curves.
Types of Imperfect Markets
- Imperfect markets discussed: monopoly, oligopoly, and monopolistic competition.
- In a monopoly, one seller offers a unique product.
- In monopolistic competition, many sellers offer differentiated products.
- In an oligopoly, a few firms sell either homogeneous or heterogeneous products.
Cost Concepts and Curves
- Quantity refers to the number of units produced.
- Fixed cost (FC) stays the same regardless of output (e.g., rent).
- Variable cost (VC) changes as output changes (e.g., fuel).
- Total cost (TC) equals fixed cost plus variable cost.
- Average cost (AC) is total cost divided by quantity produced.
- Marginal cost (MC) is the cost of producing one additional unit.
- Fixed cost curve is flat; variable and total cost curves slope upwards.
- AC and average variable cost (AVC) curves typically decrease, flatten, then rise due to the law of diminishing returns.
- MC curve may decrease initially, then rises as more units are produced.
Revenue Concepts and Curves
- Total revenue (TR) is the income from selling output (TR = price × quantity).
- Average revenue (AR) is TR divided by quantity, and equals the price per unit.
- Marginal revenue (MR) is the additional revenue from selling one more unit.
- In imperfect markets, AR and demand curves are the same and slope downward.
- Price tends to decrease as quantity increases due to the downward-sloping demand curve.
- TR in imperfect markets increases but at a decreasing rate as price falls with additional output.
- MR declines faster than AR and can become negative if output increases too much.
Product Differentiation and Market Secrets
- Products in monopolistic competition are differentiated by quality, branding, or other unique attributes.
- Product differentiation makes customers loyal, even if products are similar.
- In perfect markets, identical products can be replicated, unlike differentiated goods in imperfect markets.
Key Terms & Definitions
- Fixed Cost (FC) — Costs that do not change with output (e.g., rent).
- Variable Cost (VC) — Costs that vary with output level (e.g., raw materials).
- Total Cost (TC) — The sum of fixed and variable costs.
- Average Cost (AC) — Total cost divided by quantity produced.
- Marginal Cost (MC) — Cost of producing one additional unit.
- Total Revenue (TR) — Total income from sales (price × quantity).
- Average Revenue (AR) — Revenue per unit sold; equal to price in imperfect markets.
- Marginal Revenue (MR) — Extra revenue from selling one more unit.
Action Items / Next Steps
- Complete the self-assessment by marking your test with the provided answers.
- Distinguish between fixed and variable costs using given examples.
- Review the shapes and relationships of cost and revenue curves.