Answer to Question #209151 in Microeconomics for CHIM

Question

Explain why any imperfect market structure is one of the sources of market failures. Give an example by showing graph/calculation and descriptions.

Answer 1

Solution:

An imperfect market refers to any economic market that fails to meet the stringent standards of a perfect or purely competitive market.

An imperfect market structure is one of the sources of market failures since all parties do not possess complete and accurate information, individual buyers and sellers can influence prices and production, there is a lack of full disclosure of information regarding prices and products, and there exist high barriers to entry or exit in the market. All these characteristics will lead to a collapse of the economic market. This is because it will lead to inadequate distribution of resources since the forces of demand and supply will not be met, resulting in market distortion.

 

An example of an imperfect market is a monopoly.

A monopoly is a market structure where there is only a single dominant seller who controls the market. Products and services sold in this market have no substitutes. There are high barriers to entry in this market and a single seller who determines the prices of goods and services.

A monopoly sets the profit-maximizing output where the MR = MC and sets the price on the demand curve, hence earning supernormal or economic profits.