How have you faced competition?How would you define competition in economic terms?What does perfect competition mean to you?

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7.1 Perfect Competition

CHAPTER 7 MARKET STRUCTURES

Simplest market structurePerfect competition: a market structure in which a

large number of fi rms all produce the same productSince each fi rm produces so little compared to the

total supply, no single fi rm can influence market price.

Each fi rm can only decide how much to produce, given their production costs and the market price.

PERFECT COMPETITION

Very few industries meet all of the conditions for perfect competition.

Examples: farm products, stocks on NYSEFour conditions:

1) Many buyers and sellers participate in the market.2) Sellers offer identical products.3) Buyers and sellers are well informed about the products.4) Sellers are able to enter and exit the market freely.

CONDITIONS FOR PERFECT COMPETITION

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

Everyone must accept the market price as given.The market determines price without any influence

from individuals because it is unlikely large groups of buyers or sellers will work together to bargain for a better price.

MANY BUYERS AND SELLERS

No diff erences between the products sold by diff erent suppliers

Commodity: a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk

Key to perfect competition because the buyer will not pay extra for one particular company’s goods. The buyer will always choose the supplier with the lowest price.

Ex. If a rancher needs to buy corn to feed his cattle, he won’t care which farm grew the corn as long as every farm is willing to deliver the corn he needs for the same price.

IDENTICAL PRODUCTS

They need to know enough about the market to find the best deal.

Information about the features and the priceFor market to be eff ective, buyers and sellers have to

have clear incentives to gather as much information as possible.

Trade-off: the time spent gathering information must be worth the amount of money saved.

Ex. Most buyers would not research to save 5 cents on a pack of gum.

INFORMED BUYERS AND SELLERS

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

More fi rms = more competition = lower pricesOne company = higher prices

FREE MARKET ENTRY AND EXIT

Factors that make it diffi cult for a new fi rm to enter a market

Can lead to imperfect competition A market structure that doesn’t meet the conditions of

perfect competitionCommon barriers: start-up costs and technology

BARRIERS TO ENTRY

The expenses a fi rm must pay before it can begin to produce and sell goods.

Ex. When starting a sandwich shop, the owner needs to rent a store, buy appliances, and print menus.

Markets with high start-up costs are less likely to be perfectly competitive. Why?

Internet has decreased start-up costs in many markets (ex. Can sell online instead of in a physical store) -> more markets that are competitive

START-UP COSTS

Some markets require a lot of technical knowledge.Prevents those markets from being perfectly

competitive. Why?

TECHNOLOGY

Perfectly competitive markets are effi cient, keeping prices and production costs low.

All inputs have to be used to their best advantage -> prices and revenue accurately reflecting how much the market values the resources.

Prices correctly represent the opportunity costs of each product.

Prices just cover the production costs since they are driven so low.

Review: highest profi ts are when cost to produce 1 more unit = market price of the unit

Therefore, outputs are determined by the most effi cient use of inputs since no 1 supplier can aff ect market prices.

PRICE AND OUTPUT

With your group (1 sheet of paper per group) Brainstorm a real product you want to produce. Determine if it would be part of a perfectly competitive

market or not. What makes it part of one or what prevents it from being part of one?

Brainstorm a list of 10 start-up costs. What technology/training/education would you need? What are some potential barriers to starting production

(outside of set-up costs and technology)?

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