Unit 5_Market Structure

Unit 5_Market Structure - UNIT 5 MARKET STRUCTURE Perfect...

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UNIT 5: MARKET STRUCTURE Perfect Competition – A Definition The use of the word “competition” in economics is much different from that in sports. Thus when economists say that firms are competitive, we mean that firms are generally unconcerned with the actions of other firms in the same market. Perfect competition is a market structure in which firms within an industry are characterized by a large number of buyers and sellers. All buyers and sellers are engaged in the purchase and sale of a homogeneous commodity and they all have perfect knowledge of market prices and quantities. Under perfect competition there is no discrimination, and there is perfect mobility of resources. Characteristics of a Perfectly Competitive Market There are five characteristics of a competitive market (sometimes called a perfectly competitive market): 1. There are many buyers and sellers in the market. 2. The good being sold is a homogenous (the same) product. All buyers and sellers have perfect knowledge of market prices and quantities. Page | 1
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3. No single buyer or seller is able to influence the price of the good. 4. Firms can freely enter or exit the market. 5. There is perfect mobility of resources. Many Buyers and Sellers The size of a perfectly competitive market is not established in terms of numbers. Instead, the word “many” connotes the idea that the production of each individual seller would be like a drop in the ocean. If in a town of 1,500 people, there were 1,000 food outlets all offering Caribbean Creole cuisine, new firms coming into the business or existing ones leaving, would probably have no noticeable impact. In the same vein, a firm in a perfectly competitive market could increase or decrease in size, enter or leave the industry, and no one would notice the difference. If the firm cuts back production, the market will not experience a sudden shortage; if it increases production, there will not be any noticeable surplus of goods on the market. The Good being Traded is a Homogenous Product This characteristic means that the product sold by one firm is considered in the same way as that sold by another firm. It is standardized, homogeneous, and undifferentiated among firms. These products are identical in the minds of buyers. It is assumed that buyers do not recognize any difference between the goods produced by Firm A and those produced by Firm B. When we speak of homogeneity, we are referring to economic homogeneity, not physical homogeneity. Even if the product supplied by one firm may not look exactly like that supplied by another, buyers treat them in the same way. In instances where buyers may treat Firm A’s product differently from Firm B’s, it is very likely the case that there is some accompanying feature in Firm A’s product that leads the consumer to recognize a difference – probably the packaging, or the way the product is displayed. When, for whatever reason, consumers start making a distinction between versions of the same product, an important characteristic of a
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This note was uploaded on 02/19/2011 for the course ECON 219 taught by Professor Professorbrown during the Spring '11 term at Bethune Cookman.

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Unit 5_Market Structure - UNIT 5 MARKET STRUCTURE Perfect...

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