The Imperfect Markets Showdown | Cash Course: Economics | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy from personal budgeting to macroeconomics. Check out more episodes at prageru.com. Welcome to the great market showdown where three competitors will display their pricing power, profit, and productivity for today's special product, which is the cupcake. It's fluffy, it's warm, it's delicious. The competition will be stiff and hot, but it will also be imperfect. What's an imperfect competition, you say? I'm glad you asked. But first, let's talk about perfect competition here. No one business or individual controls the market. Every product, whether it's cookies or fidget spinners, is the exact same. And businesses compete solely on price for customers. But in the real world, that's rare. Most markets have imperfect competition, which means some sellers have an edge and can heavily influence consumer choices and prices. Maybe they're the only ones producing chocolate chip cookies or smidg spinners. So, without further ado, let's meet our competitors and see how they each handle cupcakes. First, we have Monopolies. No one can compete with my one-of-a-kind cupcakes. Literally no one. >> That's right. A monopoly is when a single business dominates the market, making it almost impossible for others to compete. A few key features set monopolies apart. The first is no close substitutes. This means there are no other available products close to what the company is producing, leaving buyers with no alternatives. The second is price. Monopolies become the price makers, which means they can set the price for the product because they control the supply. >> That'll be $10 per cupcake. 15? No, 20. >> High barriers of entry also characterize monopolies, preventing other businesses from competing in the market. One common barrier is control of resources like a baking company having exclusive access to the world's supply of vanilla beans. In monopolies, businesses can also grow very large, allowing them to produce at lower costs than any newcomer could match. They can even charge different people different prices, a strategy called price discrimination, to squeeze out every last dollar from consumers. Can't believe this cupcake was $15. >> Hey, I paid 20. >> Most monopolies are illegal in the US. The exception is a natural monopoly, where the monopoly actually keeps things cheaper for consumers overall, like utility providers that service an entire state or country. >> How dare you call my cupcake empire legal? >> Now, let's meet our second contestant, Aloples. Well, it's not just me. I've got a few friends. >> In an oligopoly, a few large firms control the market. They sell similar products and have some pricing power, but they also watch each other closely. If one lowers their price or launches a new product, like a tech company releasing a new smartphone, other tech sellers must respond fast to stay competitive. >> Time to reveal blue frosting. Me too. Me three. >> Because they're so interconnected, igopolies sometimes form cartels. Illegal agreements to take advantage of consumers. Barriers to entry are still strong here. Sides, money, and resources give them advantage in the market, making it harder for small sellers to compete. Sometimes igopies will even merge together to gain more access and control over certain parts of the market. We present the collective cupcake. >> It's flavor dominance. >> And last but not least contestant, monopolistic competition. >> Blue frosting. Yawn. You know what my cupcakes have that all yours don't? Fancy flags. >> In this market structure, many sellers offer similar but not identical products. Think coffee shops, fast food chains, or hair salons. Each one tries to stand out through branding, quality, location, or service. With many firms competing with a variety of products, it's easy to enter and exit the market. Also, this means consumers have more choices, which limits how much control businesses have over prices. However, through branding and advertising, they can draw consumers to buy their products even when they are a little more expensive. These cupcakes are endorsed by the cash course boys. >> That's us. >> We are back. What is so bad? >> So bad. >> No matter the type of competition, firms still want the same thing. Maximum profits. But earning a profit in an imperfect market comes with a trade-off. Unlike highly efficient, perfect competition, imperfect competition has a few soggy bottoms. Monopolies might underproduce and overcharge since they face no real market pressure. Oligoples might make strategic moves that protect profits but leave consumers with fewer choices. Monopolistic competitors spend a lot on branding and extras which isn't always the most efficient use of resources. >> Here you go, boys. >> Show. Yo, these cupcakes are definitely not whack. Perfect competition will always be the most efficient in theory. But in the real world, we'll always be faced with an imperfect market. Whether it's a monopoly, igopoly, or monopolistic competition, those may sound less than ideal, but they can still bring buyers and sellers together. And that's what market competition is all about. Now, without further ado, it's time to announce today's winner. And the winner is none of you. >> Who do they think? >> We endorse things. >> Well, that's just the way the cookie crumbles. Here's to the next great market showdown. [Music] Watch more at pragerids.com. And parents, don't forget to subscribe.