MICROECONOMICS

Microeconomics



Microeconomics Competition

Market Structure

An idealized market structure with the following assumptions:

Buyers and sellers have perfect knowledge of what is going on in the market place,

There are many buyers and sellers,

There is unrestricted entry into, and out of the market,

The good in question is homogeneous (of the same quality), and

The seller of the product has limited or no control over the price (price taker) in the marketplace because of competition.

The perfect competitor, therefore, faces an infinitely elastic demand curve, which is equal to his or her marginal revenue and average revenue.

Perfect competition

Industries Entry and Exit

We find a situation of perfect competition when many companies sell similar products to many buyers, when there is no barrier to entry in the industry and when firms have no competitive advantage over their competitors. Businesses operating in a market with perfect competition have no influence on the price of products and services.

This means that any organization that wants to carve a place in this market will offer its products and services at the same price as all its competitors; otherwise consumers will have the reflex to look elsewhere. For example, the rice industry is an industry under perfect competition. The short term decisions are made based on the seasonal and cyclical price. The long term decisions, they will be taken more into line with demand for the product or service and technological innovations in the industry.

Economic theory distinguishes different forms of competition according to the varying degrees of market power that firms possess. Following neoclassical economic methodology, the various forms of competition are modeled using more or less realistic assumptions. As a result, some forms of competition, including the benchmark model of perfect competition, never exist in practice. Under perfect competition, all firms in the market are price takers; they regard the price as given (Tremblay, 2007).

At the market price, the marginal costs of firms equal their marginal revenue they do not make a profit. Note also that the equilibrium of the perfectly competitive market is a Pareto optimum. No one's welfare could be increased without making someone else worse off. At the other end of the spectrum, firms with monopoly power benefit from significant barriers to entry. Potential entrants are unlikely to be as cost effective as the incumbent sole supplier, and even if they succeeded in overcoming this challenge, they would face an uphill struggle against an established brand. As a consequence, models of monopoly power predict handsome profits (Snowdon, 2005).

Buyers and Sellers

Perfect competition is a type or model of the market in which there are many buyers and sellers who are willing to sell or buy products freely between them are uniform, or equal in a given market (like the market for copper, wood, wheat or other commodities, agricultural commodities, financial securities or products are well known and standardized), but no discernible influence on the selling price because it is so impersonal set by the market in which the information circulates perfect way so that ...