Perfect Competition

In: Business and Management

Submitted By ganderson091
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SUMMARY OF PERFECT COMPETITION

There are high requirements in order for perfect competition to exist. They are: 1. Many buyers and many sellers. Why? 2. Free entry (and exit). Why? 3. Perfect knowledge about prices and quantities for those in that market. Why? 4. Homogeneous product. Why?

Who determines the price in a perfectly competitive market? -The market does. How? The demand and supply determine what the market price and quantity are.

How large is the market? How large are the firms in it? -The market can be very large. However since there are many firms, each firm is rather small. They are small enough so that no single firm can affect the price; they must accept the market price.

You mean to say that if I am the owner of a competitive firm, I cannot change prices? Who can tell me what to do, if I am the boss! -You will accept the market price. This is when you learn about the power of market forces. One option: You could lower the price and make less profit. Why lower the price, if you can sell your product at the market price. Second option: if you raise the price, your clients will go elsewhere since there are many competitors nearby who charge the market price. Therefore, you will not lower the price nor raise it; you will accept the market price.

Perfect competition will keep prices reasonable and provide the markets with many choices of goods. When prices are reasonable, it means that more people can afford them; the standard of living increases.

Why is perfect competition important, if it is not easily found in the market place? -There are many policies that the government imposes on the markets. What are these policies to achieve? Do they have a target? Perfect competition serves as a goal for those policies; it is there to give direction to the best available path for society.…...

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