This is a two-part discussion topic. In the first part, you will demonstrate your understanding of...

This is a two-part discussion topic. In the first part, you will demonstrate your understanding of one key aspect of perfect competition. In the second, you will apply your understanding of perfect competition to the world around you.

1. In a perfectly competitive industry, buyers and sellers are "price-takers". What exactly does it mean to say that sellers are price takers? [Hint: Why does a seller not sell at a price lower than the market-established equilibrium price? Why does a seller not charge a price higher than what has been established in the market?]

2. Identify an industry / market that, in your understanding, can be described as being close to "perfectly competitive". Explain your choice.

Expert Solution

Q1) In a perfectly competitive market, buyers and sellers are price takers and price is determined by the forces of market demand and market supply and a firm sells its output at the given price. The firm is a price taker because of the following reasons:

1. Large numbers of firms : The number of firms in a perfect competition is so large that no individual firm is big enough to influence or change the total market supply. Accordingly, the individual firm cannot influence the market price. A firm is to take the market price as given or constant.

2. Homogeneous product : All firms in the industry produce homogeneous product. Products of all the firms are perfect substitutes of each other so a firm cannot fix a price higher as buyers will shift to the other firms. The firm will be simply driven out of the market if it sets a price higher than the equilibrium price. A firm will not set a price lower than the equilibrium price if it can sell any quantity of the product at the given price.

3. Perfect knowledge : Buyers in perfect competition have perfect knowledge of the availability of product and price of the product. This is the reason why a producer cannot charge a higher price from the buyers assuming that the buyers are ignorant about it. Buyers will simply shift to the other firm or producer or seller if a particular firm charges a higher price.

A firm under perfect competition has no control over the price of the product as even a small increase in price can lead to zero demand.

Rahul Sunny answered 1 year ago

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