ECON1101 Chapter Notes - Chapter 7: Imperfect Competition, Market Power, Perfect Competition
Document Summary
Characteristics number 1, 2 and 6 of a perfectly competitive market state that consumers and suppliers are price takers, goods are homogenous and there is free entry/exit. In the next two chapters we challenge all these assumptions. Price-taking firms can sell as much as they want at the current market price. However, if they increase the price, they lose all their sales. Visually, this means that the demand curve for the individual firm is horizontal (perfectly elastic). Note: the demand curve for the individual firm is horizontal, but the demand curve for the entiremarket need not be. Firms with market power are said to be price-makers (or price-setters) in that they have the ability to set their own prices. This means that when the price-setting firm increases the price, it does not lose all its customers (just some of them). This is the basic difference between a price-taking and a price-setting firm.
