2.11.3 (HL)—Degrees of market power

Market power is the ability to influence price. A perfectly competitive firm is a price taker, so market price fixes a horizontal firm curve $P=D=AR=MR$; imperfectly competitive firms face downward-sloping demand and have varying price-making power.

The competitive firm maximizes profit where rising $MC=MR=P$. At that output, $AR>AC$ gives abnormal profit, $AR=AC$ normal profit and $AR<AC$ a loss in the short run. Free entry and exit remove abnormal profit in long-run equilibrium.

Efficiency

The competitive market is allocatively efficient when $P=MC$, equivalently $MB=MC$, so community surplus is maximized under the model. Label the market equilibrium separately from the individual firm's horizontal demand curve.

Do not use a monopoly patent example to teach the perfect-competition Objective. Price-taking requires the market assumptions, and $MC=MR$ identifies output while AR versus AC identifies profit.

A high market share can be temporary; evidence of barriers and switching costs is needed before inferring durable power.