Imperfect Market SS2 Economics Lesson Note

An imperfect market may be defined as a market in which prices of goods or services can easily be influenced by the sellers or buyers.

In other words, an imperfect market is a market situation in which the forces of demand and supply do not operate freely.

TYPES OF IMPERFECT MARKET

1. Monopolistic Competition: This is a market situation in which many producers or sellers are producing or selling identical but non-homogenous commodities. Goods are not homogenous due to branding or use of trademarks or the services offered may differ in quality.

2. Oligopoly: This is an imperfect market in which there are few producers or sellers of the same commodity. Also known as a colluding oligopoly.

3. Duopoly: This is a market situation in which there are only two sellers or producers of a commodity but there are many buyers.

4. Monopoly: This is an imperfect market in which there is a single seller of a particular good or service.

CONDITIONS FOR IMPERFECT MARKET

1. Heterogeneous commodity
2. There is only one or very few buyers and or sellers
3. There is an imperfect knowledge of market transactions
4. There is no free entry into or exit from the market
5. Preferential treatment exists

No uniform prices

6. There are transport costs involved in moving goods and factors of production
7. Goods are not portable

 MONOPOLY

A monopoly is a market situation in which an individual or firm controls the total output or supply of a good or service which has no close substitutes.

Features Of Monopolistic Market

1. There is only one seller or a combination of firms under one management. The single seller has no rivals.
2. The monopolist can control either price or output, but not both at the same time
3. Entry is restricted or barred in monopolistic markets.
4. There is no perfect substitute for the products of the monopolist
5. There is an imperfect knowledge of market transactions.

Types Or Causes Of Monopoly

i. Natural Monopoly: Nature does not distribute its resources evenly over the earth.

Social or government monopoly

ii. Legal monopoly: Monopoly may be created by law

iii. Voluntary Monopoly: This type of monopoly is formed when firms willingly merge or combine

iv. Technological Monopoly: This is a monopoly which arises as a result of technological development

v. Patent Law: This law confers a firm special privilege to protect its new invention and it tends to scare away other competitors.

Advantages Of Monopoly

i. Economies of scale due to greater efficiency and full utilization of productive resources.

ii. Reduced risk of over-production.

iii. Avoids duplication or wastage.

iv. Greater efficiency in organisation.

v. Centralized management.

vi. Product standardization.

Disadvantages Of Monopoly

i. Profiteering and exploitation of consumers.

ii. Restriction of output, and scarcity of product.

iii. Restriction of consumers” choice

iv. A lack of enterprise and insufficiency.

v. Resource misallocation.

Control Of Monopoly

i. Provision of substitute products.

ii. Privatisation.

iii. Stoppage of issuance of patent law.

iv. Discouraging merging of firms.

v. Reduction of tariff.

EQUILIBRIUM OF THE MONOPOLIST.

Price and output determination: A monopolist cannot fix price and output at the same time. He has two options; 

1. To fix the price and leave the output to be determined by the demand.
2. To fix output to be produced and allow the price to be determined by the demand.

The demand curve facing the monopolist is downward sloping because the firm is also the industry. The most profitable output is where MC=MR. The monopolist can earn an abnormal profit, both in the short run and long run. In the short run, a monopolist will be at equilibrium if the following conditions are fulfilled:

a) The marginal cost is equal to the marginal (MC=MR).

b) Marginal cost cuts marginal revenue from below. The slope of MC is greater than the slope of MR at the point of intersection. 

MONOPOLIST EARNING NORMAL PROFIT

A monopolist can also make a normal profit. The equality of marginal cost and marginal revenue at point b determines the quality of Q1 which is sold at price A. The monopolist earns a normal profit when the average cost curve is tangential to the average revenue at this level of output.

MONOPOLIST EARNING LOSS

In a monopoly market, loss can be made if the variable cost is outside the revenue area. The equilibrium position is that MC=MR. The price of the monopolist as fixed by the demand does not cover the average cost. 

ASSIGNMENT 

1. Output any two differences between monopoly and perfect competition
2. Explain the following:

• Monopolistic competitive market 
• Oligopoly
•  Oligosony.