Question

Markets are separated into two broad categories based on their level of competition. On the one hand there are perfectly competitive markets and on the other hand, there are all other market structures which are grouped under imperfect competition. Markets under imperfect competition are generally described by fewer firms with each firm having some degree of market power depending on the number of firms in the market. Discuss the fundamental differences between perfect competition and imperfect competition (include a discussion of marginal revenue). In addition, discuss how the degree of market power effects the welfare of producers, consumers, and society. 20 Points

Answer 1

Fundamental differences between -

Perfect Competetion	Imperfect Competetition
The market is influenced by the market forces of supply & demand	The market forces of supply and demand have no influence on the market
Marginal revenue will be equal to the price of commodities because the additional unit of output will be equal to the price	Marginal revenue is less than price because price must be lowered to sell an additional unit of commodity
Each firm is a price taker	Individual firms are price makers

A firm is said to have a market power when it has the potential to manipulate the market forces of demand and supply, and thus, the price level in the economy. With a greater degree of market power, the ability of a firm to influence the market forces also increases.
The firms can manipulate its profit maximizing units of quantity and thus create a barrier to entry for new entrants in the market, making it the sole producer of a particular good. This will make the other producers in the economy worse off. Similarly, an imperfectly comptitive market structure will have the ability to exploit consumer surplus by charging each individual their maximum willingness to pay, thus making the consumers worse off. And, lastly, the decrease in supply and an increase in prices of commodities in the market can create a huge deadweight loss, which in turn will affect the social welfare of the economy, making the society worse off.