Perfectly Competitive Market 8.1-1 Flashcards
What is Market Power?
The ability of a firm or a group of firms in a specific market to influence the price and quantity produced of a product.
What is one way you know that a firm has market power?
If it can raise the price of the product without losing all its customers to a competitor.
What is the second way you know that a firm has market power?
If it can lower the price of the product without attracting the entire market.
What determines whether or not a firm has market power?
It depends on how large the firm is relative to the customers.
What is perfect competition?
A market is said to be in perfect competition if it is characterized by a large number of small firms selling identical goods and there are no barriers to entry. Perfectly competitive firms are price-takers.
In Perfect Competition:
The output of a single firm is small relative to the market demand; the market wants to buy a lot more than one firm can produce.
In Perfect Competition continued:
All firms sell identical products and customers do not distinguish between products.
What does it matter that competitors produce an identical product?
It matters because when customers care about the color, shape, texture, etc., of a product, they may be willing to pay a slightly higher price for a product that looks better.
What is the pricing like when there are a lot of competitors in the market?
There isn’t a lot of moving room for prices when competitors produce identical products. They all have to stick to a specific price range.
In Perfect Competition continued 2:
There are no barriers to entry. Any firm can enter and exit whenever it would like.
Firm and Market demand in Perfect Competition:
Market supply and demand determine the equilibrium price for the product. Firms take price as given.
Firm and Market demand in Perfect Competition continued:
If they raise their price they will lose all customers to competitors. Why charge a lower price when they can sell all they produce at market price?
An Individual Firm’s Demand says:
At the going price, P*, a firm can sell as much output as it wants. The individual demand curve of a perfectly competitive firm is a horizontal line at the market price.
