One serious deviation from an efficient market comes from imperfect competition and monopoly elements. Whereas under perfect competition no firm or consumer can affect prices, imperfect competition occurs when a buyer or seller can affect a goods price. For example, if the telephone company or a labour union is large enough to influence the price of phone service or labour, respectively, some degree of imperfect competition has set in. When imperfect competition arises, society may move inside its production possibility curve. This would occur, for example, if a single seller raised the price of a good sky-high to earn extra profits. The output of that good would be reduced below the most efficient level, and the efficiency of the economy would thereby suffer. In such a situation, the invisible-hand property of markets may be violated.
Imperfect competition leads to prices that rise above cost and to consumer purchases that are reduced below efficient levels. The pattern of too high price and too low output is the hallmark of the inefficiencies associated with imperfect competition.
In reality, almost all industries possess some measure of imperfect competition. Airlines, for example, may have no competition on some of their routes but face several rivals on others.
Imperfect competition leads to prices that rise above cost and to consumer purchases that are reduced below efficient levels. The pattern of too high price and too low output is the hallmark of the inefficiencies associated with imperfect competition.
In reality, almost all industries possess some measure of imperfect competition. Airlines, for example, may have no competition on some of their routes but face several rivals on others.
