Question

5. For the Pure Competition Market Structure 1
List and explain the characteristics of pure competition and why we study that market structure.

1)Very Large Numbers of buyers and sellers(small market shares)
2)Standardized Product-perfect substitutes(all the same)Examples?
3)“Price Takers”(individual producers and consumers have no control over price or quantity)
4)FreeEntry and Exit-from the market

Please help to explain these four answers for the above question.

Answer 1

1. Very large numbers of buyers and sellers
Under pure competition market structure, there are a large number of sellers as there are no restrictions to prevent entry of any seller and also there is no mechanism to discriminate among buyers so there are a large number of buyers. So, Each firm will have small market share because of large number of firms.

2. Standardized product-perfect substitutes
All the firms in an industry under pure competition produce homogenous products. For example- Industry of pencils. All the firms in the industry are producing pencils. Thus, it is the standardized product in the industry and buyers will be indifferent between buying it from different sellers.

3.Price Takers
Firms are price takers as there are a large number of firms so price is determined through competition. If any seller charges a price higher than the other seller then it would lose all market share to the other seller so all sellers will charge the same price and due to competition price charged will equal their marginal cost. If any firm charges price higher than marginal cost then some other firm will charge price equal to marginal cost and maximise its profit. And similarly a buyer also doesn't have control over price and quantity as there are a large number of buyers so if one buyer doesn't acceot the ongoing market price then seller can sell his product to some other buyer. So, Profit maximising price and quantity are determined through competition.

4. Free entry and exit from the market
As there is no restriction on entry so any number of firms can enter the industry and there are no restrictions on exit also so if a firm wants to discontinue its production, it can exit. Thus, under pure competition, there exists free entry and exit from the market.