If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:10:00

Perfect and imperfect competition

AP.MICRO:
PRD‑3 (EU)
,
PRD‑3.B (LO)
,
PRD‑3.B.1 (EK)
,
PRD‑3.B.2 (EK)
,
PRD‑3.B.4 (EK)

Video transcript

in this video we're going to give an overview of the types of markets that you might encounter an economics class and we're gonna get a little bit precise with our language because you'll hear words like perfect competition or monopoly or oligopoly a lot in economics and frankly even in your broader life now before we even go into those terms I will differentiate between what's sometimes referred to as a product market and other markets that are referred to as a resource resource markets now a product market is a market where the output of that market what the market is producing or what it's buying and selling it is something that people will consume and it doesn't just have to be a physical product it could also be some type of a service so examples of product markets it could be the market for shirts it could be cars or it could even be a service it could be tax preparation tax preparation these would all be product markets because it's something that people would consume and I would call this consumer tax preparation not business tax preparation so this is consumer tax preparation now based on my clarification you might guess what a resource market is all about these are markets for the inputs into other products or into the production of other even resources so these would be your famous inputs of or factors of production so it could be for example the market of Labor it could be something like farmland where farmland is used to produce something else it could be the market for capital goods maybe robots for factories but either way whether we're talking about product markets or resource markets we can think about them in broad terms based on how many players there are in the market and how differentiated the players are on the market and how much control they have over the price and how are the barriers to entry so let's set up a spectrum here to explore that a little bit so I will set up a spectrum now the extreme to the spectrum right over here when you only have one player one player in the market in the market or actually let me just say one firm because player is not really clear what I'm talking about whether I'm talking about a buyer or seller one firm in market and let's say many buyers many buyers you are probably familiar with what we call this market or what we would call this firm it has a monopoly it has a monopoly named for a famous game and because that whole point of that game is to try to be that last firm standing the firm that owns all of the real estate now what are the situations that would describe a monopoly well a monopoly is a situation where you have very high one could argue insurmountable barriers to entry so very high high barriers barriers to entry and monopolies can sometimes be controversial but they're not necessarily illegal in fact in many countries a monopoly can be granted to a firm through things like the intellectual property or through patents for example a drug company if it discovers a cure for a drug or something to maintain a drug well they might be granted a monopoly for that pill for some period of time and the government does that so that they could recoup their investment in all of the R&D that they actually produced what often is illegal in a lot of countries is if a firm misuses its monopoly power but anyway now let's go to the other extreme let's imagine a situation where instead of high barriers to entry there's no barriers no barriers to entry and let's say that there is no differentiation and you have many players so many let me write many firms might keep wanting to say players but that doesn't make it that clear and actually let me say many firms and many buyers and many buyers now this is a state that will often study in our economics class we'll call it perfect comp addition perfect competition and in a perfect competition world the firms are essentially have to be price takers they take whatever the market price is and we've used that assumption in a lot of situations in a monopoly on the other side they could be the price centres they're the only player in that market now in general when anything is described as perfect it's usually theoretical and so is perfect competition there's no markets that I can think of that are perfectly perfect but I can think of ones that are close for say some agricultural commodities so say the sugar market so the market for sugar might be pretty close to perfect competition there could be many firms those would be the farmers the suppliers will be many buyers obviously who want sugar there would be some barriers to entry you need to know how to grow sugar you would need suitable land for growing sugar but there's a lot of farmers who might be able to swap out either sugar cane or beet which is where most sugar comes from with soybean or vice versa so they can change which crops they they plant and and generally speaking there's not much differentiation whether you get sugar from one farmer or another so sugar would be pretty close to perfect competition and it is the case for a lot of agricultural commodities that you they do have to be price takers there is just a market price that the individual farmer is gonna say well I actually I want to charge a little bit more for that sugar because they won't be able to they're just gonna have to take whatever the price is in the market now as you can imagine there's a lot of other types of markets that are in between these extremes closer to a monopoly and similar to a monopoly in a lot of ways is a situation where you have only a handful of firms and that's referred to oligopoly oligopoly and this is a situation where you still have high barriers so high bear high barriers to entry you might have a handful of firms so a few a few firms and you still have many buyers and examples of oligopolies this could be things like the aircraft industry aircraft where there's huge areas of entry you need to deploy a lot of capital billions of dollars you might have to get government approval and so that's why especially for large aircraft you only have a few firms that can produce like Boeing or Airbus those really large aircraft even in certain cases automobiles sometimes computer manufacturers things that have very very high barriers to entry now if we go a little bit further to the left you get a situation that's known as monopolistic competition monopolistic it's fun to say competition and this you could view as right in between depending on what you're thinking about so this is a situation where there's low barriers to entry low low barriers to entry there's many firms many firms but you do have differentiation you do have differentiation so you can tell the product of one firm for another and I can think of many in fact most industries I can think of fall roughly in the monopolistic area although there's I've we just mentioned some oligopolies and monopolies but examples of monopolistic competition I can imagine to be things like cereal breakfast cereals and the breakfast cereal industry there's many many firms there's generally low barriers if you there's some barriers but they're pretty low if you want to start a cereal company a lot of folks might be able to do it but there is some differentiation some people who some say hey our cereal is more delicious and it's sweeter while others say our cereal is is more nutritious and they build a brand and they do marketing etc etc and because there is some differentiation there's a little bit more ability for the individual players unlike a in perfect competition there's a little bit more ability for them to dictate their price they might say hey we're premium product people think we're healthier so we might be able to charge a little bit more you can almost imagine that they have their own unique demand curve because of that differentiation you can imagine the market in something like well those shirts that's another example where a lot of folks can produce shirts but some people might be able to differentiate them they're more stylish there's better quality they advertise they build a brand and so once again that would be monopolistic competition so anyway the big picture here is really just for you to get familiar with these words what do they mean and in what context or what will they imply about the differentiation or the number of firms and actually before I leave I'll throw out one other word that you'll hear a little bit less than what I just talked about and it sounds like monopoly but it is a monopsony and I'm gonna do this in a unique color here let me see I haven't done anything in this salmon yet monopsony which you won't hear it as much as monopoly and it's really the opposite situation instead of one supplier and many buyers a monopsony is one big buyer and many suppliers so for example if you have one big-box store in a small town and so they're the only employer in that town they might have monopsony in the labor market where they're the only people who can hire and there's a lot of people who are looking for jobs but we could talk more about that in other videos