PERFECT COMPETITION

• ECONOMICS
• Chapter 7: Section 1
• PAGES 151-154

Perfect Competition

• Defined as…
• - a market structure in which a large number of firms all produce the same product.

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• It is assumed that the market is in equilibrium and that all firms sell the same product for the same price.

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• No one firm has control over the industry and as such cannot hope to influence prices.

4 Conditions for Perfect Competition

• Many buyers and sellers participate in the market.

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• Sellers offer identical products.

• Buyers and sellers are well informed about products.

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• Sellers are able to enter and exit the market freely.

Few industries meet all of these conditions!

• Let’s Take a Closer Look!

Many Buyers and Sellers

• No individual can be powerful enough to buy or sell enough goods to influence the total market quantity or the market price.

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• Everyone in the market must accept the market price as given.

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• The market must be able to operate on its own.

Identical Products

• A product that is considered the same regardless of who makes or sells it is called a commodity.
• - low-grade gasoline
• - corn, wheat, soybeans, etc…

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• The buyer will not pay extra for one particular company’s goods.

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• The buyer will always choose the supplier with the lowest price.

Why do we choose the lowest priced commodity?

Informed Buyers and Sellers

• They must know enough about the market to find the best deal they can get.

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• Both have clear incentives to gather as much information as possible.

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• But, a buyer’s willingness to find information about prices and availability represents a trade-off…
• - TIME!

Free Market Entry and Exit

• Firms must be able to enter the market when they can make money and leave when they can’t earn enough to stay in business.

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• This is competition!!!

Barriers to Entry

• Any factor that make it difficult for new firms to enter a market.

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• They can lead to imperfect competition.

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• Common barriers include start-up costs and technology.

Start-Up Costs

• Expenses that a new business must pay before the first product reaches the consumer.

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• Markets involving high start-up costs are less likely to be in perfect competition.

What Are the Start-Up Costs?

Technology

• Some markets require a high degree of technological know-how.

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• Preparation and study are required before some firms are able to enter the market.
• - Professional training or University training comes at a trade-off.
• - Is it worth it?

Price and Output

• A perfectly competitive market is one that is efficient.

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• Competition within the market keeps both the production costs and prices low.

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• Think back to the Market Equilibrium Price of the last unit.

• Producers must base their decisions on their most efficient use of available land, labor, capital, and management skills to bring home a profit.