Lets begin by discussing our first market the

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Unformatted text preview: and Markets ers and sellers), and a few things that differ. Let’s begin by discussing our first market, the perfectly competitive market. QUESTION: For me, as a buyer, almost all markets seem the same. For example, I can’t tell much difference between the market for books and the market for skateboards. In both markets, if I want to buy something, I pay the price that is charged. What are economists looking at to distinguish one market from another? ANSWER: What you implied about markets—they all seem the same—can be said about other things too. Someone might say that he can’t tell much difference between two shirts. But, on a closer look, one shirt might be cotton and the other flannel, or one might be a shortsleeve shirt and the other a long-sleeve shirt. It is the same with markets: the closer you look at them, the more differences you can find. Economists look 08 (186-221) EMC Chap 08 5/25/06 3:03 PM Page 189 at a variety of things to distinguish between markets, such as how many sellers there are in a market (many, a few, only one), how many buyers in a market, and whether sellers sell the same good or a slightly differentiated good. You will see more of the differences as you progress through this chapter. Characteristics of a Perfectly Competitive Market Economists categorize markets according to their characteristics. Here are four characteristics of a perfectly competitive market. 1. The market has many buyers and many sellers. 2. All firms sell identical goods. 3. Buyers and sellers have relevant information about prices, product quality, sources of supply, and so on. 4. Firms have easy entry into and exit out of the market. Many different kinds of stores sell many different products in a typical modern mall. Do you think any of the markets represented by these stores and products are perfectly competitive markets? If so, what four characteristics must be present? Jones is a wheat farmer, or a producer and seller of wheat. Does Jones sell his wheat in a perfectly competitive market? In other words, is the wheat market a “perfectly competitive market”? To answer this question we have to determine whether the wheat market has the four characteristics that any perfectly competitive market has. First, does it have many buyers and many sellers of wheat? The answer is yes; so the first characteristic holds for the wheat market. Second, do all wheat sellers sell the same wheat? For a given type of wheat, the answer is yes. It would be impossible, for example, to tell Jones’s wheat from any other farmer’s wheat. So, the second characteristic of a perfectly competitive market holds. Third, do buyers and sellers of wheat possess information on the quality of wheat, prices of wheat, and so on. The answer is yes. For example, wheat farmers often get up in the morning and check the daily wheat report. They know what price wheat is selling for on that given day. So, the third characteristic of a perfectly competi- tive market holds. Fourth, is entry into and out of the wheat market easy? In other words, is it easy for Jones to leave the farming business if he wants to, and would it be easy for others (if they wanted to) to get into the farming business. The answer is yes. Nothing prevents Jones from deciding to no longer be a farmer and nothing prevents you or anyone else from being a wheat farmer. If an accountant at an accounting firm wants to quit his job tomorrow, buy some land in Kansas, and start wheat farming, she is free to do just that. You might say it is expensive to get into farming, so doesn’t that make it hard to get into farming? It may be expensive, but what economists mean when they say that there is “easy entry and exit” is that no entity prevents the entry into or exit from a market. For example, government doesn’t prevent individuals from going into farming if they want. So, the fourth characteristic of a perfectly competitive market is met. We can conclude then the wheat market is a perfectly competitive market. EXAMPLE: perfectly competitive market A market structure characterized by (1) many buyers and many sellers, (2) all firms selling identical goods, (3) all relevant information about buying and selling activities available to buyers and sellers, and (4) easy entry into and easy exit out of the market. Section 1 A Perfectly Competitive Market 189 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 190 Sellers in a Perfectly Competitive Market Are Price Takers price taker A seller that can sell all its output at the equilibrium price but can sell none of its output at any other price. Sellers of commodities such as corn and wheat are price takers. Can you explain why? Because of the four characteristics of a perfectly competitive market, sellers in this market end up being price takers. It is similar to saying that a person who exercises daily, eats healthfully, and always gets enough sleep will end up being healthier than if the person didn’t do these things. Certain things follow from certain characteristics. When it comes to the perfectly competitive market, its...
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This document was uploaded on 01/16/2014.

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