Microeconomics Chapter 7: Perfect Competition

Perfect Competition

• 5 key characteristics of perfect competition:
  • Many buyers and sellers
  • Standardised products (e.g., agricultural products, basic commodities)
  • Freedom to enter and exit markets
  • Independent buyers and sellers
  • Well-informed buyers and sellers

Characteristics of Perfect Competition

• Multiple buyers help maintain reasonable prices
• Standardised products enable customers to focus on price over product features
• Freedom to enter and exit markets allows businesses to respond to profitability
• Independent buyers and sellers ensure market competitiveness
• Well-informed buyers and sellers enable efficient price determination

Real-World Examples of Perfect Competition

• Corn market: thousands of growers, standardised products, but government subsidies can interfere
• Beef market: many producers, standardised products, but natural resource scarcity can impact prices

Perfect and Imperfect Competition

• Perfect competition: an economic model with many sellers, identical products, and equal access to information
• Imperfect competition: occurs in markets with few sellers or differentiated products, leading to price control and limited substitutes

Standardised vs Brand Name Products

• Standardised products: identical products, lack of differentiation (e.g., milk, eggs, wheat)
• Brand Name products: differentiated by brand name, logo, packaging, etc., and can be identified by brand name

Price Takers and Independent Buyers and Sellers

• Price takers: buyers and sellers accept the market price set by supply and demand
• Independent buyers and sellers: individual companies without mergers or joint price determination

Impact of Monopoly

Characteristics of Monopoly

• Only one seller in the market
• Restricted, regulated market due to government regulations
• Control of prices due to lack of close substitutes

Types of Monopoly

• Natural monopoly: cost of production is lowest with only one producer (e.g., water company)
• Government monopoly: government-owned or permitted single producer (e.g., postal service)
• Technological monopoly: one firm owns the invention, technology, or method (e.g., Polaroid)
• Geographic monopoly: no other sellers within a region (e.g., professional sports)

Monopoly Concepts

• Economies of scale: savings in costs gained by increased production
• Patents: legal registration of invention, giving inventor sole rights
• Costs: price of production
• Efficiency and government monopolies: evaluating the efficiency of government-controlled industries

Profit Maximization by Monopolies

• When marginal revenue equals marginal cost

Monopoly Concepts (continued)

• Price makers: sellers with market and pricing power to influence prices
• Cartel: an association of manufacturers or suppliers to maintain prices and restrict competition
• Barriers to entry: obstacles to new businesses entering the market due to existing dominance

Trade Barriers

• Definition: barriers set by a nation to limit free trade among nations
• Examples of Trade Barriers:
  • Import quota: limits the amount of products that can be imported
  • Tariff: fees charged for goods imported from another country