uni/economics

Perfectly competitive markets

Characteristics

1. Many buyers and sellers, all of whom are so small in relation to the market that no individual buyer or seller has the power to influence the equilibrium price/quantity
   • but a collective action taken by many buyers or sellers will have an impact
2. All sellers sell identical products or services
   • buyers don’t care about who they buy from; they only care about price → sellers cannot raise prices without risking loss of customers
   • the risk is that prices decline when taking products to market (“price takers”)
   • farmers combat this through grain storage – temporary storage of grain to sell when the market improves
     • watch this youtube video
3. There are virtually no barriers to entry or exit
   • they can leave markets that are no longer profitable
   • can easily employ resources elsewhere
   • easy access to labour, capital, other resources necessary to enter market
4. Buyers and sellers are well-informed
   • sellers know if there are better ways of doing things/better opportunities elsewhere
   • buyers know where the prices are lower

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• every buyer pays and every seller charges the same market price
• information on prices travel costlessly and instantly → buyers know if prices are lower elsewhere
  • buyers will buy from the lowest price
• no seller or buyer is big enough to influence the market price
• all sellers sell an identical good or service

Concept Check

Thinking time

Are petrol stations and/or agricultural markets perfectly competitive?

• my attempt: Neither – big corporations dominate both and decide prices for us
• answer: Agricultural markets are closer
  • coffee, sugar, wheat are traded in exchanges with centralised market prices
    • brokers, sellers, buyers have transparent prices
  • they approximate perfectly competitive markets closely
  • BUT some agricultural products are industrial → some buyers have more bargaining power than others
    • e.g. star anise has high demand becaause of Roche, which makes the Tamiflu vaccine
      • big buyer → lower prices for them → not perfectly competitive
  • wheat as a perfectly competitive market held truer in the days of family farms than massive agricultural industries
  • there’s lots of “apples”, which makes the market not homogenous – unlike copper or gold
  • even accounting for similar locations, brands have different prices
  • buyers believe petrol brands are distinct, maybe because of advertising
• petrol stations are retail stores, and retailers have different prices based on location
  • in a perfectly competitive market, products are identical and buyers buy based on the lowest price (aka best value for them)
• almost no real market satisfies the assumption
  • BUT predictions are still useful
  • it’s a good benchmark for other markets
• Demand & supply analysis can be used for markets close to perfectly competitive