Can you tell the difference between a grain of rice from one farm from another grain from a different farm? Chances are you can't. And it's markets like this - with identical goods that leave producers to be price takers (rather than having some/much control of their price and quantity combination), and also where entry into and exit from the market are relatively easy, that the economy is supposed to work at its best. Examining how a producer in such a market structure maximizes its profit, why is this type of market structure deemed to be the most efficient and optimal?
Can you tell the difference between a grain of rice from one farm from another grain from a different farm? Chances are you can't. And it's markets like this - with identical goods that leave producers to be price takers (rather than having some/much control of their price and quantity combination), and also where entry into and exit from the market are relatively easy, that the economy is supposed to work at its best. Examining how a producer in such a market structure maximizes its profit, why is this type of market structure deemed to be the most efficient and optimal?
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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 identical products buyers must regard all sellers' products as equivalent. |
| 3. | Firms and resources must be fully mobile, allowing 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 behavior, 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.
|
Scenario |
Competitive? |
|---|---|
| The government has granted the U.S. Postal Service the exclusive right to deliver mail. | ________________ |
| Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some makers use higher-quality cotton than others, which is reflected in the apparel's prices. | Ā |
| Two taxi companies serve most of the market in a big city. Consumers don't care about which taxi company they take if they decide it's worth taking a taxi, they flag down the nearest one. | _________________ |
| There are dozens of pasta producers that sell pasta to hundreds of Italian restaurants nationwide. The restaurant owners buy from the cheapest pasta producer available to |
