Firms in a Competitive Market: Competitive Markets 9
Recall • Economists break cost into two components –Explicit costs (can be easily calculated) –Implicit costs (are hard to calculate) • Costs are defined in a number of ways, but marginal cost plays the most crucial role in a firm’s cost structure • The MC curve always leads the ATC and AVC curves • Long run costs are a reflection of scale
Competitive Markets • Competitive markets –Many buyers and sellers –Similar (if not identical) goods –Free entry and exit –Firms are price takers • Price taker –Has no control over the market price – “takes” the price as given
Are these Markets Really “Perfectly” Competitive? Example How It Works Reality Check Stock market Buyers and sellers have real-time information about prices. Most of the traders make up only a small share of the market. Large institutional investors are big enough to be able to influence the market price. Farmer’s markets Sellers are free to come and go without having to pay a fee. Many buyers are also present. The market price for similar products will converge to a single price. Many produce markets do not have enough sellers to achieve perfect competition. Higher- quality produce sellers can set their prices higher.
Are these Markets Really “Perfectly” Competitive? Example How It Works Reality Check Online ticket auctions The resale market for tickets to major events involves many buyers and sellers. The prices for seats in identical sections end up converging quickly to a narrow range. Some ticket companies and fans get special privileges that enable them to buy and sell blocks of tickets before others can enter the market.