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Lecture Principles of microeconomics - Chapter 9: Monopoly and other forms of imperfect competition

This chapter introduces you to imperfect competition, a market condition characterized by firms that face downward-sloping demand curves. You will learn that when markets are imperfectly competitive, they are usually not socially optimal. | Market Imperfections Part 3 What is Part 3 about? Slide 9 - Monopoly and Other Forms of Imperfect Competition (Ch. 9): Preview Slide 9 - Thinking Strategically (Ch. 10): Preview Slide 9 - Externalities and Property Rights (Ch. 11): Preview Slide 9 - The Economics of Information (Ch. 12): Preview Slide 9 - Monopoly and Other Forms of Imperfect Competition Slide 9 - What is Chapter 9 about? Slide 9 - I. Imperfect Competition and Market Power Slide 9 - A. Price Taker v. Price Setter Perfectly Competitive Firm: A firm that must take the price in the market A price taker Imperfectly Competitive Firm: A firm with at least some latitude to set its own price A price setter Slide 9 - B. Forms of Imperfect Competition Pure monopolist A firm that is the only supplier of a unique product with no close substitutes Oligopolist A firm that produces a product for which only a few rival firms produce close substitutes Monopolistically competitive firm One of a . | Market Imperfections Part 3 What is Part 3 about? Slide 9 - Monopoly and Other Forms of Imperfect Competition (Ch. 9): Preview Slide 9 - Thinking Strategically (Ch. 10): Preview Slide 9 - Externalities and Property Rights (Ch. 11): Preview Slide 9 - The Economics of Information (Ch. 12): Preview Slide 9 - Monopoly and Other Forms of Imperfect Competition Slide 9 - What is Chapter 9 about? Slide 9 - I. Imperfect Competition and Market Power Slide 9 - A. Price Taker v. Price Setter Perfectly Competitive Firm: A firm that must take the price in the market A price taker Imperfectly Competitive Firm: A firm with at least some latitude to set its own price A price setter Slide 9 - B. Forms of Imperfect Competition Pure monopolist A firm that is the only supplier of a unique product with no close substitutes Oligopolist A firm that produces a product for which only a few rival firms produce close substitutes Monopolistically competitive firm One of a large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another Slide 9 - The Key Difference – elasticity of demand A perfectly competitive firm faces a perfectly elastic demand curve for its product Firms take the price in the market, where supply and demand curves intersect, as a given Charging a higher or a lower price is not feasible An imperfectly competitive firm faces a downward-sloping demand curve Firm now has a pricing decision to make Charging a price different from competitors may be advantageous Slide 9 - Fig. 9.1 The Demand Curves Facing Perfectly and Imperfectly Competitive Firms Slide 9 - Market Power Market Power: A firm’s ability to raise the price of a good without losing all its sales “Market Power” does not mean that a firm can sell any quantity at any price it wishes. If price is raised, quantity demanded falls – but only somewhat, so the crucial issue is “how much?” Slide 9 - Sources of Market