Question

There are many distinct characteristics that classify a market as Perfectly Competitive including:

• Very large number of firms
• Homogenous products
• Entry and exit into the market free of barriers
• Perfect Information
• Individual firms are price takers
• Long run economic profits will be zero

Instructions

Given these characteristics of a perfectly competitive market, select one of the characteristics listed. In your post:

• Fully explain what that characteristic means and what its importance is to classifying a market as perfectly competitive.
  • If you have noticed this characteristic in a certain market, explain where you have seen it before or provide your own example.
• Would you see the characteristic you are discussing in any of the other three market structures - monopolistic competition, oligopoly or monopoly? Why or why not?

Answer 1

Individual firms are price takers

All goods in a perfectly competitive market are considered perfect substitutes, and the demand curve is perfectly elastic for each of the small, individual firms that participate in the market. These firms are price takers if one firm tries to raise its price, there would be no demand for that firm's product.In perfect market conditions (also called perfect competition) a firm is a price taker because other firms can enter the market easily and produce a product that is indistinguishable from every other firm's product. This makes it impossible for any firm to set its own prices.

Example

Agricultural Market is an example of Perfectly Competitive Market. The firms in agricultural markets produce homogeneous products and are price taker. Lets us suppise that world price of wheat is set up at P1. In perfect Competition price iscset up by forces of demand and supply. Each firm can sell as much as it wants but at a price fixed at P1. If a farm sets a price higher than P1, none of the buyers will purchase from the farm. Alternatively, if the farm sets a price lower than P1, it would not be advantageous.

Price maker in Monopolistically Competitive firm Monopoly and Oligopoly.

An entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have any other perfect substitutes. A price maker within monopolistic competition produces goods that are differentiable in some way from its competitors products. The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit. Oligopoly is when a small number of firms collude, either explicitly or tacitly, to restrict output and/or fix prices, in order to achieve above normal market returns.Firms in Oligopoly are price makers but must consider rivals reactions to change in price, output, product characteristics, and advertising.