Market Structures

Lyndsay Maryel Madrid MIDTERM QUIZ

7:30 – 9:00PM | TTH

MARKET STRUCTURES

* Perfect Competition

Numbers: In a perfectly competitive market, there are many buyers and many sellers. In fact, the number of buyers and sellers is effectively infinite. All firms in the industry act independently of each other.

Ease of entry:  This one is about barriers to entry. We assume that there is total freedom of entry into and exit from the market. There are no barriers to entry or exit.

Knowledge:  In a perfectly competitive market, it is assumed that both buyers and sellers have perfect knowledge, about prices in particular. Buyers and sellers know the exact price of the product charged by all firms at all times. This means that there are no search costs for consumers (searching for the best price).

Product:  The product sold by the many firms in the market is homogenous/identical.

Maximizing assumption: All firms aim to maximize their profits. That is their sole objective. Buyers aim to maximize their welfare through their purchases.

Mobility of factors:  It is assumed that all of the factors of production are perfectly mobile. If they are not being used as efficiently as they could, they will instantly move to where they will be best used without any restrictions.

Price takers:  Firms in perfectly competitive markets are price takers. This means that they have absolutely no control over the price they charge. There are so many firms that the actions of one firm will have no effect on the whole market. Buyers also have no control over the market price.

Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can...