Theory question 110
Market Structures(a) What is perfect competition?
(b) With the aid of diagrams, compare the short run equilibrium positions of a perfect competitor and an imperfect competitor.
(c) State any two features of an imperfect market.
Show the model answer
(a) Perfect competition is a market with many buyers and sellers of a homogeneous product, free entry and exit and perfect knowledge, so each firm is a price taker.
(b) Perfect competitor: horizontal AR = MR line; equilibrium where MC = MR with MC rising; price = MR; may earn abnormal profit, normal profit or loss in the short run. Imperfect competitor (monopolist): downward-sloping AR with MR below it; equilibrium where MC = MR, but price (read from AR) is above MR and MC; output is lower and price higher than under perfect competition. Each diagram should show the curves, equilibrium output and price, and the profit area.
(c) Any two: few sellers or a single seller; differentiated products; barriers to entry; imperfect knowledge; firms are price makers; advertising; price discrimination possible.
Key difference: P = MR for a perfect competitor, P > MR for an imperfect one.