ECONOMICS TOPIC 4 LESSON 1

ECONOMICS TOPIC 4 LESSON 1

PURE COMPETITION

ESSENTIAL QUESTION

How does competition affect markets?

Conditions for Pure Competition

While few industries meet all the conditions for pure competition, some come close.

Many buyers and sellers participate in the market.

Sellers offer identical products.

Buyers and sellers are well informed about products.

Sellers are able to enter and exit the market easily.

Open Ended

A purely competitive market has many suppliers selling identical products called commodities. Analyze Information Why isn’t the market for automobiles a purely competitive market?

Many Buyers and Sellers

Markets with pure competition require many participants on both the buying and the selling sides. This condition leads to an important feature of purely competitive markets—the inability of any buyer or seller to control price. 

Identical Products

n a purely competitive market, there are no differences between the products sold by different suppliers. This is the second condition for pure competition.

Informed Buyers and Sellers

The third condition for a purely competitive market is that buyers and sellers know enough about the market to find the best deal. Under conditions of pure competition, the market provides the buyer with full information about the features of the product and its price. 

Easy Market Entry and Exit

The final condition of a purely competitive market is that firms must be able to enter it when they can make money and leave it when they can’t earn enough to stay in business. 

Multiple Choice

Identify Central Ideas Why are individual suppliers unable to set their own prices in a purely competitive market?

• Their products are too unique to generate demand.

• The market is flooded with excessive supply.

• They do not have enough influence over the market.

• Government price fixing takes away their freedom of action.

Barriers to Entry and Competition

Factors that make it difficult for new firms to enter a market are called barriers to entry. Barriers to entry can lead to imperfect competition, a market structure that fails to meet the conditions of pure competition. Common barriers to entry include start-up costs and technology.

High Start-Up Costs

The expenses that a new business must pay before it can begin to produce and sell goods are called start-up costs.

When the start-up costs in a market are high, entrepreneurs are less likely to enter that market. As a result, markets that involve high start-up costs are less likely to be purely competitive markets.

Complex Technology

Some markets require a high degree of technological know-how—the knowledge and skills needed to create or repair something. 

As a result, new entrepreneurs cannot easily enter these markets without a lot of preparation and study. Technological barriers to entry can keep a market from becoming purely competitive.

Multiple Choice

Analyze Information Which type of business would have the lowest technological barrier to entry?

• dog walking

• medical laboratory payroll

• processing firm

• smartphone app development

Price, Output, and Purely Competitive Markets

One of the primary characteristics of purely competitive markets is that they are efficient. Competition within these markets keeps both prices and production costs low. Firms must use all inputs—land, labor, organizational skills, machinery and equipment—to their best advantage. As a result, the prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the inputs used to produce the product. In a purely competitive market, prices correctly represent the opportunity costs of each product.

Open Ended

In pure competition, suppliers must match the lowest supplier’s price or exit the market. Apply Concepts Why are consumers unwilling to pay one supplier’s higher price in such a market?

Multiple Choice

Draw Conclusions Why is a purely competitive market undesirable for owners of supplier firms in that market?

• high revenues

• high wages

• low costs

• low profits

Open Ended

How does competition affect markets?