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3 Cards in this Set

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A perfectly competitive market is rare, but the ones that do exist are very large, such as the markets for agricultural products, stocks, foreign exchange, and most commodities. Pure competition also offers a simplified economic market model that yields useful insights into the nature of competition and how it provides the greatest value to consumers.Perfectly competitive markets have 4 essential qualities:1. large number of firms supplying the product,2. standardized or homogeneous products,3. low entry and exit costs for firms entering or leaving the industry, and4. suppliers are price takers in that no individual supplier has any influence on the market price.That a large number of firms create a highly competitive market results from the fact that the product is standardized or homogeneous and that the costs are low to enter or leave the industry. A high barrier to entry would otherwise limit the number of suppliers in the market. Hence, there will be many suppliers for standard products as long as the market price is above the average total cost of supplying the products.The suppliers of the competitive market are price takers — they have no influence whatsoever on the market price because each supplier has only a tiny share of the total market. If some suppliers try to raise their price by even a few pennies, then consumers will simply buy from other suppliers. On the other hand, for the individual seller, market demand is completely elastic, so there is no reason for any supplier to sell even a penny less than the market price, since they can sell all that they want for the market price.If the products were differentiated to some degree, then the market would be a monopolistic competition, by definition, which would allow some suppliers to charge a slightly higher market price if they can convince consumers, through advertising or other methods, that their product is worth the higher price.Monopolistic competitionMonopolistic competition is a market structure characterized by many firms selling products that are similar but not identical, so firms compete on other factors besides price. Monopolistic competition is sometimes referred to as imperfect competition, because the market structure is between pure monopoly and pure competition.Economic efficiency is also middling. Competitive markets provide efficient outcomes, monopoly markets exhibit deadweight losses— monopolistic competition is somewhere in between, not as efficient as pure competition but less deadweight loss than a monopoly. The major benefit of monopolistic competition is the supply of a wide variety of goods and services.Monopolistic competition exists:· where there are a large number of sellers, each with a small market share;· little interdependence among firms so that they can price their product with little regard to how the competition will react;· little possibility for collusion to fix prices.


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