1. Market Power

• So far, we have assumed that no market participant has the ability to influence the marke tprice through its individual actions
• A market where all participants act as price takers is said to have perfect competition
  • Achieving or approximating perfect competition is a very desirable goal from a global perspective because it ensures that the marginal cost of production is equal to the marginal value of the goods to the consumers
  • In perfectly competitive market, the market price is a parameter over which firms have no control
    $\pi=\frac{d c_{SR}(y)}{dy}$
  • Each firm should increase its production up to the point where its marginal cost is equal to the market price
• When competition is not perfect, each firm must consider how the quantity it produces might affect the market price

2. Monopoly

• The minimum efficient size(MES) of a firm in a particular industry provides a rough indication of the number of competitors that one is likly to find in the market for the product of this industry

• The shape of this curve is determined by the technology used to produce the goods

  

  • On (a), the MES is much smaller than the demand for the goods at this minimum average cost, the market should be able to support a lasrge number of competitors
  • On (b), the MES is comparable to the demand, the market cannot support two profitable firms and monopoly situation is likely to develop

• A monopolist will reduce its output and raise its price above its marginal cost of productions to maximize its profit

• From a global perspective, this is not satisfactory because consumers purchase less of the goods than if they were sold on a competitive basis

• The intersection of the demand and marginal cost curve gives a price $\pi_{MC}$ that is lower than the average cost of production
  • To avoid driving the monopolist out of busincess, the regulator must set the price at leat at the value $\pi_{AC}$ given by the intersection of the demand curve and the average cost curve
  • Such a situation is called a natural monopoly