Market Structures: Perfect Competition

Our microecon class is working on different forms of market structures.  The first one we started with is Perfect Competition.

 

Perfect Competition

• Fundamental stipulations

 

In a perfectly competitive market, participants, both consumes and producers are price-takers.  Price-taking means that they can't influence the market price--they must "take" the market price.  This is generally always true for consumers, but producers can influence market price of the good or product via their behavior.  Anyways... both producers and consumers are price-takers--the market price is given.

 

Perfectly competitive industries, where producers can't influence price aren't very common.  Individual farmers producing wheat or corn, pharmaceuticals after the patent has run out and generics hit the market; are examples of perfectly competitive markets.

 

None of the producers in a perfectly competitive market can have a large market share--they have have to be one of many firms in the market, none of whom create a very large percentage of the total industry output.

 

Consumers must consider all products equivalent--it has to be some kind of standardized product; a commodity that can't be differentiated by the consumer via preferences or tastes.

 

There has to be free entry and exit into the market.  It has to be easy for new firms to enter and for current firms to leave, there are no government regulations or problems with accessing key resources needed to produce that good.

 

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I'm on the run... if I get time I'll move on to my notes on Production decisions in a perfectly competitive market.

 

The short and sweet of it?  Firms will produce at the point where Marginal Costs = Marginal Revenue.  Marginal Revenue, because the firms are price takers, will also be the demand curve--which is perfectly elastic (horizontal).  So Price will equal Marginal Revenue and the optimal point of production--the point at which the firm is trying to produce to will be where the firms marginal costs intersect the marginal revenue.  Which is at the market price (i.e. the demand curve).

Posted via email from Jim Nichols