11-30-11 Goal: What are the
Characteristics of Perfect
(Pure) Competition
Perfect Competition is the ideal market structure of a
market economy.
-Markets are not perfect, nothing is perfect
-The perfect competition market model is used as a
measuring stick to see where industries fall short of
perfect competition.
-If the market was perfect this is what it would look like
-No real world examples, but there are industries that
come close
5 Characteristics of Perfect (Pure) Competition
1. Many Buyers and Sellers
-Thousands of buyers and sellers (Largest amount of all
market structures)
-Products will sell at market equilibrium price
-buyers have many options if producer tries to sell above
market price
2. Standardized Product
-Consumers consider all products as pretty much the
same thing
-Products are perfect substitutes (Examples: notebook
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-Products are perfect substitutes (Examples: notebook
paper, milk, wheat)
3. Freedom to Enter and Exit Markets
-Easiest of all market structures
-Can enter the market when it is profitable
-Can leave when you are not making profit
Example: Raspberry Farmer knows what the market
price for raspberries before they plant. If they can make
a profit they will grow raspberries, if not, they won't
4. Independent Buyers and Sellers
-buyers and sellers work on their own, not together
-buyers and sellers have no control over price
-prices will be neutral
-their interaction sets the equilibrium price
Example:
5. Well-Informed Buyers and Sellers
-buyers and sellers know what market price is
-buyers can compare prices among different sellers
-sellers know what competitors are charging
-Perfect Information
Industries close to perfect competition
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Corn
-Thousands of farmers grow corn in the U.S
-each famer produces a small percentage of the total
crop
-no one farmer can control the price
-all accept market price
-fairly standardized product, usually no reason to prefer
one farmers corn over the other
Not Perfect
-Government provides subsides to protect corn farmers
from low prices
-Sometimes buyers and sellers join together to influence
the price
Beef
-many cattle producers
-not much difference in the cuts of beef from one
producer to the next
-can easily determine the market price
Not Perfect
-Cattle producers and consumers also join together to
influence the price
-Cattle producers attempt to differentiate their products
(Grass fed, corn fed, organic)
Exit Question: What are the five characteristics of the
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market structure perfect competition?
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