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Current time:0:00Total duration:4:44

Monopolies vs. perfect competition

AP.MICRO:
PRD‑3.B (LO)
,
PRD‑3.B.5 (EK)
,
PRD‑3.B.6 (EK)

Video transcript

in this video we're going to dig a little bit into the idea of what it means to be a monopoly and so to help us appreciate that let's think about the spectrum on which firms can be so this is going to be my spectrum right over here now at the left end we can imagine this idealized perfect competition perfect competition and we've talked about that in other videos but just as a review this is where you have many firms this is where they are selling an undifferentiated product or service undifferentiated undifferentiated product the firm's over here well they have no barriers to entry or exit so no barriers to entry or exit these firms that we've talked about other videos they need to be price takers why do they need to be price takers well whatever the market price is since no one cares which of these firms which of these many firms they get the product from none of those firms can really set their own price if they were to go above the market price well then no one will buy from them and so they will just be price price takers and other things that we assume about perfect competition is that all of the actors in the market what the buyers many buyers and the many sellers they all know what what the transactions are going on for they know who's selling to whom for what amount now the other extreme this is where we have the monopoly monopoly here instead of many firms selling or many firms producing you have exactly one firm producing instead of an undifferentiated product well it's differentiated because it's the only firm instead of no barriers to entry exit here we're at the exact opposite so you could say insurmountable insurmountable mountable I'll just abbreviate it barriers especially to enter and instead of being a price taker you are a price setter price setter you're the only player you're the only actor who is selling anything so you can decide what price to sell it at now perfect competition as I talked about it's a bit of a theoretical ideal it's hard to say any market that is absolutely perfect but we can imagine markets that are on this spectrum some closer to perfect competition some closer to a monopoly things that I can imagine that are closer to perfect competition might be let's say agriculture or a certain type of agriculture let's say you are buying pistachios and you might be most people are indifferent as to where their pistachios come from although some people might beg to differ that certain types of pistachios are better than others but for the most part that be closer to perfect competition there will be just a price in the market for pistachios if someone wants to grow up pistachios I'm not familiar with what it takes to grow process Geo's and I apologize to any offense to any pistachio growers out there but maybe they can just get enough land and there's very close to too low barriers to entry and they can start producing pistachios as I mentioned many would perceive it as undifferentiated and there might be many firms in say the pistachio market I actually don't know if that's the case but let's just assume that were the case it would be closer to perfect competition now a monopoly you can imagine things like things that take a lot of infrastructure in order to do that service so I can imagine things like over here close to monopoly or at monopoly you could imagine things like utilities providers utilities where it's hard for multiple people to run power lines to the various houses you could imagine things like this telecom telecom providers might be close although in most geographies you have more than one telecom providers although in some parts of the world you're getting pretty close to one because once again it's very very very high barriers to entry neither one of those you get a launch satellites and and put up and put cable under the the ground and dig up roads and whatever and so you could get closer and closer to this notion of maybe there's one firm if you're in a situation like telecom in a lot of the places where you have only a handful of firms this one is an oligopoly but let's just think about the extreme when you're in a monopoly situation and so the next few videos we're going to a little bit deeper into what it means to be a monopoly and what is the rational quantity for a profit maximizing monopolistic firm to actually produce and what would be their economic profit