I'm in first-year university I was told that this idea is the base of microeconomics. I'm kinda confused about it, so I tried a few sample questions. Namely, I had trouble answering the following questions regarding perfect competition:

1) How can I justify the assumption that all firms in an industry are fully competitive? I'm given this information:

- the firm has 14% market share (with over 5 other firms)
- the firm cannot increase sales through advertising or product differentiation
- the firm outsources its production to minimize costs.

2) How can I justify the assumption that, in this situation, all customers are fully informed? I have a bit more info, but I'm not sure if it would help my argument:

- the firm produced in City 1 (with higher costs) and now produces in City 2 (with lower costs)
- the workers in City 1 are pretty ticked off
- the employees, citizens, and government of CIty 2 will benefit financially, socially, and economically from the move.
- the firm promises to help pay

Thank you

CaptainForest

Microeconomics was never my strong suit, but I have with me some of my notes from my first year university that explains all this….I tried to post it in an attachment but apparently the file is too big.

If you’d like, I can email you the entire document. In the mean time, I am posting the relevant sections which I think are the most important.

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Pure Competition (Perfect Competition): A market structure in which a very large number of firms produce a standardized (homogenous) product.

Pure Monopoly: A market structure in which one firm is the sole seller of a product or service.

Monopolistic Competition: A Market Structure in which a relatively large number of sellers produce differentiated products.

Oligopoly: A market structure in which a few large firms produce homogenous or differentiated products. (Strategic Interaction)

Imperfect Competition: The market models other than pure competition (Table in page 215)

A perfectly competitive market (pure competition) has the following characteristics:

• There are many buyers and sellers in the market.

Example: Markets for Farm Commodities

• The goods offered by the various sellers are largely the same.

student007

Thanks, I would really appreciate that. But before I read it, would you be able to explain to me the idea that all customers are fully informed? Because if the market's perectly competitive, then prices for a single good should be constant throughout. Wouldn't that render full information customer useless? Also, does perfect competition not allow for market shares that are unequal? That is, does each firm in the industry (under perfect competition) have to have an equal market share?

CaptainForest

Here is my understanding on it:

Pure Competition (Perfect Competition): A market structure in which a very large number of firms produce a standardized (homogenous) product.

So, no, they don't have to have equal market share, but rather not a lot. I believe that if 5 firms control 80% or more of the market share, that is a monopoly.

While the market is Perfect Competition, that doesn’t mean the price is the same throughout. Each firm tries to spin their product through marketing to make it seem like there product is a better one.

For example, donaughts. Is a Tim Hortons Donaught really that different than a Country Style Donaught? NO. Yet Tim Hortons charges more for their Donaught b/c of their name and reputation. Because…it’s Tim Hortons!!!

Guest

Perfect competition has 5 characteristics defining it:
1) all products are homogenous (exactly the same)
2) firms are price-takers (i.e. price is determined by market supply and demand - firms can't choose their own prices to charge)
3) there is perfect long run mobility of factors of production
4) all consumers and firms all have perfect information about all other jobs, prices, etc
5) the cost structure of all firms is identical

these characteristics will always hold true for perfect competition. Perfect competition is an ideal type of market structure and only really exists to compare other, imperfect market structures too. the closest example to PC you'll find in real life is agriculture.