Pure Competition: Characteristics and OccurrenceThis is a featured page

Very large numbers
  • There is a large number of of independently acting sellers, each offering their products in large national or international markets
    • ex. farm commodities, the stock market, the foreign exchange market

Standardized product
  • The product is standardized because it is either identical to each other, or homogeneous
  • As long as the price is the same, consumers will be indifferent about which seller to buy the product from
  • The producer would not lower the price, since it will not earn anything by shrinking its profit.
  • Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A
    • Thus, each firm is a price taker since consumers will simply buy from another firm if one firm raises their prices.
  • Because the firms sell standardized products, they make no attempt to differentiate their products and do not engage in other forms of nonprice competition
  • Any changes made to a product would result in a unified change throughout all firms because one major characteristic of pure competition industries is that there is perfect knowledge of the product.

"Price takers"

  • Individual firms exert no significant control over product price
  • Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or product price
  • The individual competitive producer is at the mercy of the market; asking a price higher than the market price would be futile
  • Because the market is filled with an infinite number of firms all selling the same product, any single firm represents a minuscule portion of the whole market causing:
    • No single firm can change market price by adjusting output as it makes up a small percentage of the entire market supply
  • Competitive firm is a price taker, because it cannot change market price; it can only adjust to it
  • There is no profit to be made because the price each business operates at is only enough to cover a unified normal profit, therefore going below the price would result in an economic loss.

Free entry and exit
  • There are no legal, technological, financial, or other obstacles that prevent firms from entering or leaving a competitive market.
  • It is easy for firms to enter or exit the industry (especially if it has small economies of scale).
  • This is only possible in a purely competitive market because firms in this type of market are "price takers," and the number of firms does not affect the price of a product.
  • This characteristic is key in determining that in the long-run, firms have no economic profit, as the price would eventually equal minimal ATC (average total cost)

Pure competition is rare in the real world, but the model is important because it provides a standardized against which to compare and evaluate the efficiency of the real world. A realistic example, closest to pure competition, would be the agriculture industry.

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