Imperfect Market | Economics for JAMB PDF Download

Pure Monopoly, Discriminatory Monopoly, and Monopolistic Competition

1. Pure Monopoly:

• A pure monopoly exists when a single firm dominates the entire market and has complete control over the supply of a particular product or service.
• Assumptions:
  • There is only one seller in the market.
  • The firm has significant barriers to entry, such as patents, exclusive access to resources, or legal restrictions.
• Characteristics:
  • The monopolist is a price maker, meaning it can set the price of the product.
  • There are no close substitutes available in the market.
  • The monopolist can earn economic profits in the long run due to the absence of competition.
  • The monopolist may engage in price discrimination, charging different prices to different groups of customers.

2. Discriminatory Monopoly:

• A discriminatory monopoly occurs when a monopolist charges different prices for the same product to different customers or groups of customers.
• Characteristics:
  • The monopolist has the ability to segment the market based on factors such as location, age, income, or willingness to pay.
  • The firm can charge higher prices to customers with a higher willingness to pay, increasing its profits.
  • Price discrimination can lead to a more efficient allocation of resources and increased consumer surplus.

3. Monopolistic Competition:

• Monopolistic competition refers to a market structure where there are many firms selling similar but differentiated products.
• Assumptions:
  • There are many firms in the market, but each has a small market share.
  • Products are differentiated based on branding, quality, packaging, or other non-price factors.
• Characteristics:
  • Firms in monopolistic competition have some degree of market power, allowing them to influence the price of their product.
  • There is freedom of entry and exit, leading to relatively low barriers to entry.
  • Firms compete on both price and non-price factors, such as advertising or product differentiation.
  • In the long run, firms can earn normal profits as new firms enter or exit the market based on perceived profitability.

Short-run and Long-run Equilibrium Positions

1. Short-run Equilibrium:

• In the short run, firms in imperfectly competitive markets can earn economic profits or incur losses.
• Profit Maximization:
  • Firms will produce where marginal cost (MC) equals marginal revenue (MR) and set the price based on demand conditions.
  • If price exceeds average total cost (ATC), the firm earns economic profits.
  • If price is below ATC but above average variable cost (AVC), the firm incurs losses but continues operating to minimize losses.
• Entry and Exit:
  • If firms in the market are earning economic profits, new firms will be attracted, increasing market supply.
  • As market supply increases, prices will be driven down, reducing profits for existing firms.
  • Conversely, if firms are incurring losses, some firms may exit the market, reducing supply and potentially increasing prices.

2. Long-run Equilibrium:

• In the long run, firms in imperfectly competitive markets tend to earn normal profits.
• Entry and Exit:
  • If firms are earning economic profits, new firms will enter the market, increasing supply and reducing prices.
  • As supply increases and prices decline, profits for existing firms decrease until they reach normal profit levels.
  • If firms are incurring losses, some firms may exit the market, reducing supply and potentially increasing prices.
• Zero Economic Profits:
  • In the long run, firms will produce at a level where price equals average total cost (ATC) and economic profits are zero.
  • Each firm in monopolistic competition will have its unique equilibrium position, with prices slightly higher than marginal cost.