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Concept
Imperfect competition
Summary
In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition causes market inefficiencies, resulting in market failure. Imperfect competition usually describes behaviour of suppliers in a market, such that the level of competition between sellers is below the level of competition in perfectly competitive market conditions.
The competitive structure of a market can significantly impact the financial performance and conduct of the firms competing within it. There is a causal relationship between competitive structure, behaviour and performance paradigm. Market structure can be determined by measuring the degree of suppliers' market concentration, which in turn reveals the nature of market competition. The degree of market power refers to firms' ability to affect the price of a good and thus, raise the market price of the good or service above marginal cost (MC).
The greater extent to which price is raised above marginal cost, the greater the market inefficiency. Competition in markets ranges from perfect competition to pure monopoly, where monopolies are imperfectly competitive markets with the greatest ability to raise price above marginal cost.
The imperfect market faces a down-ward sloping demand curve in contrast to a perfectly elastic demand curve in the perfectly competitive market. This is because product differentiation and substitution occurs in the market. It is very easy for a consumer to change their seller which makes the consumer sensitive to price. The Law of demand also plays a very vital role in this market. As price increases, quantity demanded decreases for the given product. The demand curve in perfectly competitive and imperfectly competitive market has been illustrated in the image on the left.
Economists primarily use these assumptions of perfect competition for developing economic policy, including economic welfare and efficiency analysis.
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Competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, individuals, economic and social groups, etc. The rivalry can be over attainment of any exclusive goal, including recognition. Competition occurs in nature, between living organisms which co-exist in the same environment. Animals compete over water supplies, food, mates, and other biological resources.
Market structure
Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets. The main body of the market is composed of suppliers and demanders. Both parties are equal and indispensable. The market structure determines the price formation method of the market.
Profit maximization
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" (whether operating in a perfectly competitive market or otherwise) which wants to maximize its total profit, which is the difference between its total revenue and its total cost.