Forms of Market: Perfect Competition

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Questions and Answers

What is a key characteristic of a market in economics?

  • It involves only local trade
  • It always refers to a physical location
  • It is limited to online transactions
  • It includes all systems that connect buyers and sellers (correct)

In perfect competition, individual buyers and sellers have control over the market price.

False (B)

What type of product is sold under conditions of perfect competition?

Homogeneous product

In perfect competition, individual firms are considered ______ because they must sell at market price.

<p>price takers</p> Signup and view all the answers

Match the concepts with their definitions related to perfect competition:

<p>Large Number of Firms = Each firm's supply has little impact on total market supply Large Number of Buyers = Individual buyers have no influence over market price Homogeneous Product = Identical products are sold by all firms Price Taker = Individual cannot set the price of the product</p> Signup and view all the answers

What characterizes the demand curve for a firm under perfect competition?

<p>Perfectly elastic (D)</p> Signup and view all the answers

A firm in perfect competition can set its own price without affecting the market.

<p>False (B)</p> Signup and view all the answers

What is the significance of perfect knowledge in a perfectly competitive market?

<p>Buyers and sellers are fully aware of the market prices, leading to a single prevailing price.</p> Signup and view all the answers

In perfect competition, a firm faces a perfectly elastic demand curve, which can be denoted as $E_d = _____.$

<p>∞</p> Signup and view all the answers

Match the characteristics of perfect competition with their descriptions:

<p>Price Taker = Firms cannot influence the market price. Homogeneous Product = Identical products offered by all firms. Free Entry and Exit = Firms can join or leave the market without restrictions. Perfect Mobility = Factors of production can move to where they are most rewarded.</p> Signup and view all the answers

Why do firms in perfect competition avoid setting prices higher than the market price?

<p>They will lose customers to competitors. (D)</p> Signup and view all the answers

Factors of production are perfectly mobile under perfect competition.

<p>True (A)</p> Signup and view all the answers

Explain the term 'unnecessary loss due to lower price fixation' in perfect competition.

<p>Lowering prices to attract buyers leads to losses, as firms cannot sell more than the current market demand.</p> Signup and view all the answers

What shape indicates a perfectly elastic demand curve?

<p>A horizontal line (C)</p> Signup and view all the answers

A perfectly competitive firm can control the price of its product.

<p>False (B)</p> Signup and view all the answers

What happens to market supply when firms earn extra-normal profits?

<p>Market supply increases as new firms join the industry.</p> Signup and view all the answers

In a perfectly competitive market, a firm's demand curve is perfectly elastic, which means that the firm can sell any amount of its output at the prevailing __________.

<p>price</p> Signup and view all the answers

Match the following scenarios with their outcomes in perfect competition:

<p>Extra-normal profits = New firms enter the industry Extra-normal losses = Some firms exit the industry Constant price = Firm sells any amount at market price Price decreases = Market supply increases</p> Signup and view all the answers

Under perfect competition, what is the long-term profit situation for firms?

<p>Firms only earn normal profits (D)</p> Signup and view all the answers

The price remains the same regardless of whether quantity demanded is OA or OB.

<p>True (A)</p> Signup and view all the answers

Flashcards

Large Number of Firms

A large number of firms selling a particular commodity where no single firm has control over the price. Firms are price takers, meaning they must sell at the prevailing market price.

Large Number of Buyers

A market where there are many buyers, none of whom have a significant impact on the price of the commodity. Buyers, like sellers, are price takers.

Homogeneous Product

All firms sell identical products with no difference in quality, features, or branding. Think of generic products.

Price Determined by Market Forces

The price of a commodity is determined by the forces of supply and demand. Firms have no control over price; they simply accept it.

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Perfect Competition

A market structure characterized by many buyers and sellers, a homogeneous product, and no individual firm's control over price. Firms are price takers.

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No Product Differentiation

No seller has an advantage, meaning buyers see all products as identical. This results in a single, uniform price across the market.

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Free Entry and Exit

Firms can freely enter or exit an industry without any legal hurdles or barriers.

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Independent Decision-making

Each firm operates independently without any collusion or agreements with others.

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Perfect Mobility

Resources like labor and capital can move seamlessly between industries seeking the highest returns.

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Perfect Knowledge

Buyers and sellers are fully informed about prevailing prices and market conditions.

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Price Taker, not a Price Maker

A firm in a perfectly competitive market can sell any quantity at the existing market price. It has no power to set its own price.

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Perfectly Elastic Demand Curve

The demand curve faced by a firm under perfect competition is horizontal, indicating an unlimited ability to sell at the market price.

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No Extra Transport Cost

No additional costs are incurred for transportation when buyers choose from different sellers.

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What is a perfectly competitive firm's demand curve like?

In perfect competition, a firm can sell any amount of output at the prevailing market price. Its demand curve is a horizontal line, indicating no control over price.

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Who sets the price in perfect competition?

The market determines the price in perfect competition, and firms must accept it. They can sell as much or as little as they want at that price.

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What does a perfectly elastic demand curve indicate about a firm's pricing power?

A perfectly elastic demand curve implies that the firm has zero control over the price. Whatever quantity it produces can be sold at the prevailing market price.

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How does the firm's demand curve differ from a consumer's demand curve?

The demand curve for a firm in perfect competition is horizontal, unlike the downward-sloping consumer demand curve, which reflects a consumer's willingness to pay for a product.

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What are long-run profits like in perfect competition?

Long-run profits in perfect competition tend towards only normal profits, as entry and exit of firms drive prices towards the cost of production.

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Why wouldn't a perfectly competitive firm lower its price to gain market share?

If a firm lowers its price in perfect competition, it gains no advantage because it can already sell as much as it wants at the going market price.

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What prevents a perfectly competitive firm from dictating its own price?

In perfect competition, many buyers and sellers, a homogeneous product, and free entry and exit prevent any single firm from influencing the market price.

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Study Notes

Forms of Market: Perfect Competition

  • Perfect competition exists when there are many buyers and sellers of a homogeneous product.
  • No single buyer or seller can influence the market price.
  • Pricing is determined by market supply and demand.

Concept of Market

  • In economics, a market is not a physical place, but rather a system that connects buyers and sellers.
  • It facilitates the exchange of goods and services.
  • This system can include online communication or other arrangements.

Concept of Perfect Competition

  • A large number of sellers and buyers participate in the market.
  • Sellers offer identical products (homogenous).
  • Buyers and sellers have no control over the market price.

Features of Perfect Competition

  • Large Number of Firms/Sellers: Many firms are present, with each firm's output being insignificant relative to the total market supply. This makes one firm unable to affect the market price.
  • Large Number of Buyers: Many buyers exist, making each individual buyer's demand insignificant to influence the market price.
  • Homogenous Product: All firms sell identical products. This eliminates consumer preference for one firm's product over another.
  • Perfect Knowledge: Buyers and sellers have complete information about the market price and availability of products.
  • Free Entry and Exit: Firms can enter or exit the market freely without any restrictions.
  • Independent Decision-Making: Firms operate independently, without agreements regarding production quantities or prices.
  • Perfect Mobility of Resources/Factors: Factors of production (labor, land, capital) move freely between industries seeking the highest return.
  • No Extra Transport Costs: There are no variations in purchasing costs for consumers depending on their location within the market.

Firm in Perfect Competition

  • Price Taker: A firm in perfect competition must accept the market price; it cannot influence it.
  • Perfectly Elastic Demand: The demand curve for an individual firm is perfectly horizontal indicating any price outside the market price will cause zero sales.

Normal Profits in the Long Run

  • In the long run, extra-normal profits (profits above normal) attract new firms into the market
  • This increase in supply leads to falling prices and eliminates extra-normal profits
  • Losses cause firms to leave, leading to higher prices and eliminating losses.

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