Chapter 9: Competition and Monopolies - Perfect Competition

Market Structures

• Market structures categorize businesses based on their competition level.
• Four basic market structures in the American economy:
  • Perfect competition.
  • Monopolistic competition.
  • Oligopoly.
  • Monopoly.

Conditions for Perfect Competition

• Many Buyers and Sellers: A large number of buyers and sellers are required.
• Identical Products: Products must be identical or nearly identical.
  • Many perfect substitutes must exist.
  • Example: Salt is nearly identical regardless of the source.
• No Barriers to Entry: Sellers cannot prevent others from entering the market.
  • Initial costs are low.
  • The good or service is easy to learn and produce.
• Easy Access to Information: Information about prices, quality, and sources is readily available.
  • Increased information availability makes the market more competitive. The internet has increased competition due to information availability.
• Price Control: Sellers or buyers cannot group together to control prices.
• Same Price: Firms sell products at the same price (equilibrium price).
  • Little to no advertising is needed.
• Supply and Demand Control Price: Sellers cannot raise prices due to identical products available elsewhere.
  • Equilibrium controls the price.
  • The invisible hand pushes prices to equilibrium.

Agriculture as an Example

• The agricultural market is close to perfect competition.
• No single farmer controls the price.
• Wheat is the same price regardless of the seller.
• Supply and demand determine the price.
• Individual farmers must accept the market price.
• Products cannot be easily differentiated (wheat is wheat, salt is salt).

Demand for Agriculture

• The demand for agriculture is inelastic.
• Buyers do not care who they buy from because products are identical.
• Lowering the price by one farmer will not significantly change demand.

Benefits of Perfect Competition

• Prices drop to a level that benefits both consumers and entrepreneurs.
• The price finds equilibrium, which is the perfect price.