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50-handout - The Model of Perfect Competition A2...

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23/10/2010 1 The Model of Perfect Competition A2 Microeconomics tutor2u, November 2010 Key issues The meaning of perfect competition Characteristics of perfect competition Price and output under competition Competition and economic efficiency Wider benefits of competition in markets
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23/10/2010 2 Assumptions Behind a Perfectly Competitive Market Many suppliers each with an insignificant share of market Each firm is too small to affect price via a change in market supply – each individual firm is a price taker Identical output produced by each firm – homogeneous products that are perfect substitutes for each other Consumers have complete information about prices Transactions are costless Buyers and sellers incur no costs in making an exchange All firms (industry participants and new entrants) have equal access to resources (e.g. technology) No barriers to entry & exit of firms in long run – the market is open to competition from new suppliers No externalities in production and consumption Examples of Perfectly Competitive Markets? It is rare to find a pure example of perfect competitions But there are some close approximations: Foreign exchange dealing Homogeneous product US dollar or the Euro Many buyers & sellers Usually each trader is small relative to total market and has to take price as given Sometimes, traders can move currency markets Agricultural markets Pig farming, cattle Farmers markets for apples, tomatoes Wholesale markets for fresh vegetables, fish, flowers Street food markets in developing countries
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23/10/2010 3 Approximations to perfect competition Price Taking Firms Competitive firms in competitive markets have little direct influence on
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