ECONOMICS

Economics Questions



Economics Questions

Discuss perfect competition and long-run equilibrium.

Perfect competition is a form of market where the collective demand and supply forces determine the equilibrium market price (Baumol 2006). In other words, perfect competition is a type of market structure where the market behavior of buyers and sellers is to adapt to an equilibrium state of market conditions. Perfectly competitive markets have the following characteristics:

There are practically unlimited number of buyers (demanders) and sellers (producers or suppliers) in the market. Since this market will be characterized by a large number of small market vendors, price will not be controlled and altered. Suppliers and producers, therefore, will be price takers. Large number of buyers and sellers would imply that individual decision to impact demand or supply will be of negligible importance in the global market. A firm will not be able to offer its product on other-than-market price because consumers will move to a producer following the market price.

The market product is homogeneously produced and supplied. Since producers want to stick to the one and the only market price, their product standard is the market standard, or the industry standard. Consumers remain indifferent as to what seller to choose from when buying the product. This means that the product of one company is a perfect substitute of the product of other company.

Consumers and producer have perfect market information when making buying and selling decisions. This makes the market perfectly transparent and fair. Buyers would not need to search which will be the best seller; sellers would not need to worry about convincing their consumers about their products because they have best knowledge and awareness. Buyers accept prices as exogenous and make decisions by comparing prices, because all consumers would have the same information on prices and quantities of goods offered.

Any producer and any buyer can enter or leave the market without having to face any market or state barriers. This would also mean that firms would not need to face problems of inventory resale. When a firm wishes to enter and leave the market, it can do so with complete freedom and facilitation (Pindyck & Rubinfeld 2005). For example, if a company is producing sneakers and has no profit, it will leave this activity and begin to produce other goods that generate benefits. On the contrary, any company could enter the market attracted by the existence of high profits.

Perfect mobility of goods and factors.

There are practically no transaction costs. This means that neither buyers nor firms incur costs for the transaction of such property. This is important because it means that there would be differences in the choice of either company based on an additional cost for purchasing an asset.

In a perfectly competitive market, long run equilibrium is achieved by meeting market demand (the sum or aggregation of demand for each consumer) and industry supply (sum or aggregation of the supply of each of the companies working in this market). Equilibrium in a perfectly competitive market occurs as the price equals the quantity ...