Answer to Question #169262 in Microeconomics for EUGINE HAWEZA

Question

a. What are the main features of the perfectly competitive market?

b. With the help of well-labeled diagrams, compare the long run equilibrium of a firm under a perfectly competitive market structure and a monopoly market structure.

Answer 1

Perfect, free, or pure competition is an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but form it by their input of supply and demand.

 

In other words, it is a type of market structure where the market behavior of buyers and sellers is to adjust to the equilibrium state of market conditions.

The characteristic features of the market of perfect competition (“pure competition”) are:

- There are many small firms operating on the market, each of which is independent of the behavior of other firms and makes any decision independently.

- The share of each firm in the total supply of the industry is so small that any of its decisions to change the price will not affect the price of market equilibrium. None of the firms can influence the market price through the volume of production and the supply of goods.

- Any firm in these conditions perceives the market price as an external factor that does not depend on its actions. The firm is a price receiver, therefore, it does not have its own pricing policy.

- All firms in the industry produce homogeneous products. Therefore, the buyer does not care which company to buy it from.

- The entry of new firms into the industry does not meet any obstacles.

- Availability of information. The cost of obtaining it and the time required are zero.