ECON 001 Lecture Notes - Lecture 9: Profit Maximization, Perfect Competition, Marginal Revenue
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1. Characteristics of competitive markets
The model of competitive markets relies on these three core assumptions:
1. | There must be many buyers and sellers a few players can't dominate the market. |
2. | Firms must produce an identical product buyer must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing for free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behaviour, assume for this problem that a market cannot maintain competition in the long run without free entry.
Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.
Is the scenario | Competitive? |
---|---|
Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. | |
In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. | |
Scholastik Inc. owns the U.S. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States. | |
In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed. |