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1 Chapter 7:1 Market Structure:

2 We will examine the four conditions that are in place in a perfectly competitive market. We will examine common barriers for firms to enter the market. We will examine prices and output in a perfectly competitive market.

3 He keepeth the paths of judgment, and preserveth the way of his saints. Then shalt thou understand righteousness, and judgment, and equity; yea, every good path. Proverbs 2:8-9

4 Perfect Competition: Perfect Competition: Is called pure competition; the simplest market structure. A perfectly competitive market is one with a large number of firms all producing essentially the same product. It assumes that the market is in equilibrium and that all firms sell the same product for the same price.

5 Perfect Competition: However each firm produces so little of the product compared with the total supply that no single firm can hope to influence prices. The only decision such producers can make is how much to produce given their production cost and the market price. Farm products and the New York Stock Exchange are examples.

6 Four Conditions for Perfect Competition: (1) Many buyers and sellers participate in the market (2) Sellers offer identical products. (3) Buyers and sellers are well informed about products. (4) Sellers are able to enter and exit the market freely.

7 Many Buyers and Sellers: Perfectly competitive markets require many participants on both the buying and the selling sides. No individual can be powerful enough to buy or sell enough goods to influence the market quantity or the market price. Everyone in the market must accept the market price is given.

8 Many Buyers and Sellers: If a market has many independent buyers and sellers it is not very likely that large enough groups of either buyers or sellers will work together to bargain for better prices. Instead, the market determine price without any influence from individual suppliers or consumers.

9 Identical Products: In a perfectly competitive market, there are no differences between the products sold by different suppliers. This is the second condition for perfect competition. A farmer will not care which farmer grew the corn to feed his cattle, as long as every farmer is willing to deliver the corn he needs for the same price. If an investor buys a share it does not matter what particular share they are buying.

10 Identical Products: A product that is considered the same regardless of who makes or sells it is called a commodity. Examples include low-grade gasoline, notebook paper, sugar. Identical products are a 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.

11 Informed Buyers and Sellers: The third condition for a perfectly competitive market is that buyers and sellers know enough about the market to find the best deal. 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 sellers have clear incentives to gather as much information as possible.

12 Informed Buyers and Sellers: In most markets, a buyer s willingness 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. For example, most buyers would not search online to visit a dozen convenience stores to save five cents on a pack of chewing gum.

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14 Free Market Entry and Exit: The final condition of perfectly competitive markets is that firms must be able to enter them when they can make money and leave them when they can t earn enough to stay in business.

15 Free Market Entry and Exit: o For example, when the first companies began earning a lot of money by selling frozen dinners, several competitors jumped into the market to seek profits with their own products. o Later, when the consumers didn t buy those dinners, the firms withdrew their products from the market.

16 Free Market Entry and Exit: o Studies show that markets with more firms and thus more competition have lower prices. o When one firm can keep others out of the market, it can sell its product at a higher price.

17 Barriers to Entry: o Factors that make it difficult for new firms to enter a market are called barriers to entry. o Barriers to entry can lead to imperfect competition, a market structure that fails to meet the conditions of perfect competition. o Common barriers to entry include start-up costs and technology.

18 Start Up Costs: o Entrepreneurs need to invest money in a new firm long before they can start earning income. o Before a new sandwich shop can open, the owners need to rent a store, buy a refrigerator, a freezer, and an oven, and print menus. o The expenses that a new business must pay before it can begin to produce and sell goods are called start-up costs.

19 Start Up Costs: o When the startup costs in a market are high, entrepreneurs are less likely to enter that market. o As a result, markets that involve high start-up costs are less likely to be perfectly competitive markets.

20 Technology: o Some markets require a high degree of technological know-howthe knowledge and skills needed to create or repair something. o As a result, new entrepreneurs cannot easily enter these markets without a lot of preparation and study. o The technological barriers to entry can keep a market from becoming perfectly competitive.

21 Price and Output: o One of the primary characteristics of perfectly competitive markets is that they are efficient. o Competition within these markets keep both prices and production costs low. o Firms must use all inputs, land, labor, organizational skills, machinery and equipment to their best advantage.

22 Price and Output: o As a result, the prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the resources that have gone into the product. o In a perfectly competitive market, prices correctly represent the opportunity costs of each product.

23 Price and Output: o Prices in a perfectly competitive market are the lowest sustainable prices possible. o Because 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 sellers cost of doing business.

24 Price and Output: o Since no suppliers can influence prices in perfectly competitive markets, producers will make their output decisions based on their most efficient use of available land, labor capital, and management skills. o In the long run, output in a perfectly competitive market will reach the point where each supplying firm just covers all its costs, including paying the firm s owners enough to make the business worthwhile.

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26 Activity: o Go online and copy and paste five pictures of what you consider perfect competition and create a PDF and send it to me on showbie.

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