Submitted by: Submitted by habib
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Category: Business and Industry
Date Submitted: 11/02/2010 07:23 AM
Pure Competition:
Characteristics of Pure Competition:
1-Very large Number of sellers: one of the characteristics of pure competition is the presence of a large number of sellers in national and international markets.
Ex: Farm commodities, the stock market, and the foreign exchange markets.
2- Standardized Product: identical or homogeneous product. The buyers don’t really care which seller they are buying the product from as long as the price remains the same. If firm A is producing product A, and firm B is producing product B and firm C is producing product C, buyers will look at products A, B and C as perfect substitutes. Because these products are standardized, companies will not try to differentiate them.
3- Price takers: because there are a large number of firms in the industry producing the same product, and each firm is producing a small fraction of the product, these firms have no control over the price of the product. Therefore by increasing or decreasing the supply of the product these firms have no influence over the price because this output is just a small fraction of the total output that the whole market is producing.
Ex: if the equilibrium price in the market is 10 dollars, and Firm A charges 11 dollars for its product buyers will not buy from firm A because they will be able to buy the same product from other firms for 2 dollars.
4- Free entry and Exit: firms are able to enter and leave freely in a purely competitive market. No legal, technological, or financial constraints will prohibit these firms from doing so freely.
Demand as seen by a purely competitive market:
As we said earlier, because each firm is producing only a fraction of the total market supply, it must accept the price as it is determined by the market because it is a price taker not a price maker.
Perfectly elastic demand:
Individual firms cannot affect price, but all firms acting simultaneously can affect price if they increase or decrease output.
Purely...