4.1 Introduction to Imperfectly Competitive Markets

a. Define (using graphs where appropriate) the characteristics of imperfectly competitive markets and inefficiency.

• Imperfectly competitive markets include monopoly, oligopoly, and monopolistic competition in product markets and monopsony in factor markets.
• In imperfectly competitive output markets and assuming all else is constant, a firm must lower price to sell additional units.
• In imperfectly competitive markets, consumers and producers respond to prices that are above the marginal costs of production and/or marginal benefits of consumption (i.e., price is greater than marginal cost in an inefficient market).
• Incentives to enter an industry may be mitigated by barriers to entry. Barriers to entry—such as high fixed/start-up costs, legal barriers to entry, and exclusive ownership of key resources—can sustain imperfectly competitive market structures.
• Enduring understanding PRD-3: Even with a common goal of profit-maximization, market structure constrains and influences prices, output, and efficiency.