Perfect Competition Section 1 Market Structures Perfect Competition Section 1

Market Structures Describe the four conditions that are in place in a perfectly competitive market. List two common barriers that prevent firms from entering a market. Describe prices and output in a perfectly competitive market.

Market Structures Terms to Know Perfect Competition Commodity Barrier to Entry Imperfect Competition Start-up Costs

Market Structures COMPETITION…… Describe how you face competition in you daily lives. How does competition apply to Economics?

Market Structures In this section… We will learn about competition in business 2. About the four conditions that must be met for perfect competition to exist in the market system.

Market Structures The simplest market structure in a perfect competition. It is also called pure competition. A perfectly competitive market is one with a large number of firms all producing the same product.

Market Structures Pure Competition assumes….. The market is in equilibrium. That all firms sell the same product at the same price. Each firm produces so little of the product compared to the total supply, that no single firm can influence prices.

Market Structures The only decision that producers can make is… 1. how much to produce 2. by their given production costs 3. and the market price

Market Structures Four Conditions for Perfect Competition Very few industries meet all the conditions for perfect competition. Some of them come close Farm Products Stocks traded on the New York Stock Exchange

Market Structures Farm Products and Stock Markets fulfill four strict requirements: 1. Many buyers and sellers participate in the market. Sellers offer identical products. Buyers and sellers are well informed about the products. Sellers are able to enter and exit the market freely.

Market Structures 1. Many buyers and sellers participate in the market. No individual is powerful enough to buy or sell enough goods to influence the total market quantity or the market price. Everyone in the market must accept the market price as given. The market determines price without any influence from individual suppliers or consumers.

Market Structures 2. Identical Products There are no differences between the products sold by different suppliers. If a farmer needs to buy corn to feed his cattle, he does not care which farmer grew the corn, as long as every farm is willing to deliver the corn he needs for the same price. If an investor buys a share of a company’s stock, he or she will not care which particular share he/she is buying.

Market Structures A product that is considered the same regardless of who makes or sells it is called a Commodity. They include… low-grade gasoline; notebook, paper, and milk. Identical products are key to perfect competition for one reason: the buyer will not pay extra for one particular company’s goods. the buyer will always choose the supplier with the lowest price.

Market Structures 3. Informed Buyers & Sellers Buyers and Sellers know enough about the market to find the best deal they can get. Under conditions of perfect competition, the market provides the buyer with full information about the features of the product and its price. For the market to work effectively, both buyers and seller have clear incentives to gather as much information as possible.

Market Structures In most markets, a buyer’s willing to find information about prices and availability represents a trade-off. The time spent gathering information must be worth the amount of money that will be saved. No one is going to search the Internet or visit 5 convenience stores to save 5 cents on a pack of gum.

Market Structures Free market Entry & Exit Firms must be able to enter the market when they can make money and leave when they can’t earn enough money to stay in business. When the first companies made lots of money selling frozen dinners, several competitors jumped into the market with their own products. Later firms withdrew from the market the dinners that the consumers would not buy. Studies show that markets with more firms and thus more competition, have lower prices.

Market Structures Barriers to Entry… Factors that make it difficult for new firms to enter the market are called barriers to entry. Barriers can lead to imperfect competition. a. Start-Up Costs Long before a firm can earn money, they have to invest a lot of money to open the doors of the business. This is called the Start-Up Costs. If start-up costs are high, entrepreneurs are less likely to enter the market.

Market Structures b. Technology Entrepreneurs need to have a lot of preparation and technical know-how to be able to enter the market. Barriers of technology and know-how can keep a market from becoming perfectly competitive.

Market Structures Price & Output One characteristic of P.C. markets is that they are efficient. Competition within these markets keep both prices and production costs low. Firms must use all inputs – Land, Labor, Organizational Skills, Machinery, & Equipment to their best advantage

Market Structures Prices in a perfectly competitive market are the lowest sustainable prices possible. Many sellers compete to offer their commodities to buyers, intense competition forces prices down to the point where the prices just cover the most-efficient seller’s cost of doing business.

Market Structures Producers will make their output decisions based on their most efficient use of available land, labor, capital, and management skills.