Perfect Competition and Monopoly

Seite 1

Perfect Competition

Perfect competition - pure competition assumes that the market is in equilibrium and that all firms sell the same product for the same price

each firm produces so little of the product compared to the total supple, that no single firm can hope to influence prices

producers can only decide how much to produce, given their production costs and market price

Four Conditions for Perfect Competition

Very few markets achieve perfect competition, but some come close

Markets for farm products

Stocks in New York Stock Exchange

Both of the above fulfill strict requirements for a perfectly competitive market

Many buyers and sellers participate in the market

Sellers offer identical products

Buyers and sellers are well informed about products

Sellers are able to enter and exit the market freely

Many Buyers and Sellers Requires many individuals buying and selling

No individual is powerful enough to influence total market price or quantity

Everyone must accept the given market price

It is unlikely that large enough groups of buyers or sellers will work together to bargain for better prices

Market determines price without influence from individual suppliers or consumers

Identical Products

there must be no differences between the products sold by different suppliers

commodity is a product that is considered the same regardless of who makes or sells it

The buyer will always choose the supplier with the lowest price

Informed buyers and Sellers Buyers and sellers known enough about the market to find the best deal they can get

Market provides buyer with full information about product and its price

Both buyers and sellers need to have clear incentives to gather as much information as possible

The time spent gathering information about prices and availability must be worth the amount of money that will be saved (trade off)

Free Market Entry and Exit firms must be able to enter markets when they can make money and leave when they can't earn enough to stay in business

if there are many firms selling the same product, competition is high and prices are low

If there is one firm selling the product, they can charge a high price

Barriers to Entry

barriers to entry are factors that make it difficult for new firms to enter a market

barriers lead to imperfect competition

Start-Up Costs