Answer to Question #273259 in Microeconomics for Katie

Question

• The assumption of price-taking in perfectly competitive market is justified when there are a large number of buyers and sellers in the market. In large cities, there are many restaurants and many radio stations. Would you describe the restaurant market and the market for radio advertising as perfectly competitive? Explain whether the other assumptions are satisfied.

Answer 1

Task #273259

The market for restaurant and radio advertising in large cities cannot be described as perfectly competitive because;

A market having many buyers and sellers cannot be used as a sole characteristic to be described as perfectively competitive. Based on other characteristics of a perfectly competitive market one can argue that:

1. In a perfectly competitive market each company makes similar products - this characteristic cannot apply to radio advertising and restaurants market because each restaurant has a different menu to entice it's customers. As for radio advertising, different products may be offered from only news stations, sports and music. They may also incorporate different languages that enables the customers to choose from the different products they offer.
2. In a perfectly competitive market, there are no barriers to entry and exit in market - this is not the case for the radio and restaurants in big cities as they are restricted by the government or the communication authority in that country. They are required to meet certain conditions for them to operate and they are liable to paying taxes or unless face closure. Restaurant and radio advertising thus face barriers to entry but they may exit freely.
3. In a perfectly competitive market firms are price takers and if a firm tries to raise it's price , the demand for it's goods goes to zero - this does not apply to the restaurant and radio stations market as the customers dictate what they consume depending on their financial capability, preference or satisfaction they receive from it. In addition, even with an increase in price of products customers may still consume their goods because of the utility they get from the goods.

Thus , the market for radio advertising and restaurants cannot be described as perfectly competitive in large cities because, their existence is largely dependent on the good infrastructure in the cities such as network satellites, availability of consumers and cheap labour to run such firms.

Though the market for radio and restaurants fulfills the characteristic of many buyers and sellers it does not fulfill the other characteristics of a perfectly competitive market.