The spectrum of competition ranges from perfectly competitive markets where there are many sellers who are price takers to a pure monopoly where one single supplier dominates an industry and sets price. We start our analysis of market structures by looking at perfect competition. Firms operate within their market, which consists of:
Supply side: all of the firms producing similar products
Demand side: all buyers willing to purchase the products
Markets differ; the auto market is far different from the tomato market, for example. Thus economists separate markets into 4 categories: perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition: There are many, many small sellers (technically, there must be an infinite number of sellers), each of whom produces an identical product. It is very easy for new sellers to enter this market, and it is easy for existing sellers to leave the market. Examples: There are no real world examples of perfectly competitive markets. The stock market comes close.
2.1 Perfect competition
Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Nonetheless, there is some value in understanding how price, output and equilibrium is established in both the short and the long run in a market that holds true to the tough assumptions of a world of perfect competition. Economists have become more interested in pure competition partly because of the rapid growth of e-commerce in domestic and international markets as a means of buying and selling goods and services. And also because of the popularity of auctions as a rationing device for allocating scarce resources among competing ends. Basic assumptions required for conditions of pure competition to exist •
Many small firms, each of whom produces an insignificant percentage of total market output and thus exercises no control over the ruling market price. •
Many individual buyers, none of whom has any control over the market price – i.e. there is no monopsony power •
Perfect freedom of entry and exit from the industry. Firms face no sunk costs - entry and exit from the market is feasible in the long run. This assumption ensures all firms make normal profits in the long run •
Homogeneous products are supplied to the markets that are perfect substitutes. This leads to each firms being passive “price takers” and facing a perfectly elastic demand curve for their product •
Perfect knowledge – consumers have readily available information about prices and products from competing suppliers and can access this at zero cost – in other words, there are few transactions costs involved in searching for the required information about prices •
No externalities arising from production and/or consumption which lie outside the market
2.1.1 Characteristics of perfect competition
There are six characteristics of perfect competition
The prime characteristic of perfect competition is the existence of one single product that is sold by all suppliers at a common price, with the quality of the product being the same. This implies that the supplier the product is purchased from does not affect the buyers, due to the same price and quality. 2.
Innumerable Buyers and Sellers
The number of buyers and sellers in the market are infinite. Since only one product is being sold in the market, neither single buyer nor a single seller can determine or influence the price of the product. The price is determined by the market as a whole, depending on the total demand and requisite supply of the product in question. For instance, the process of producing or growing wheat is similar, and so is the final product. As such, wheat prices are usually similar everywhere. Only a drastic change in the demand and supply of wheat can...
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