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Running Head: MARKET STRUCTURE Name of student School: Course: Topic: Market Structure Lecturer: Date presented: Q1: Perfectly Competitive Market There is different market conditions under which firms sell goods and services referred to as market structures…
According to Baumol and Blinder (2011 p. 200), such a market must satisfy four conditions. First, the market has many small firms and customers such that no participants are large enough to have market power to affect the price of a product. If one producer reduces the price, there would be no effect on the market since the producer is negligible compared to the whole market. This condition rules out the possibilities for collusion or trade associations; each firm acts independently (Tucker, 2010). Secondly, all the suppliers sell a homogeneous product; there are no close substitutes (McEachern, 2011). As such, the consumers buy products from any seller since the products are the same thus competition is very powerful. The demand curve is perfectly elastic hence if a seller increases the price of the product, customers shift to buy competitors products. The firms have no choice but to meet and not exceed the price charged by others hence are “price takers” (Baumol & Blinder, 2011 p. 201). Thirdly, there are no barriers to entry or exit in the market. Barriers to entry may be in form of legal, technical or cost advantage but in a perfectly competitive market, any seller willing to enter the industry can do so to take advantage of economic profits and provide an identical product (p. 200). ...
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