Chapter 5 - Competition and market power. After reading the material in this chapter, you should be able to: Define perfect competition, and identify its key characteristics; describe how businesses maximize profits in perfectly competitive markets; discuss the long-term outcome of perfect competition; compare and contrast the four types of market structure; explain how market power affects price and quantity supplied. | Chapter 5 Competition and Market Power McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define perfect competition, and identify its key characteristics. Describe how businesses maximize profits in perfectly competitive markets. Discuss the long-term outcome of perfect competition. Compare and contrast the four types of market structure. Explain how market power affects price and quantity supplied. 5- The Role of Competition Competition plays a key role in a market economy. Companies are forced to deliver to the product that consumers want at the lowest cost. Competition in the market leads to more production, more innovation, lower costs, and higher living standards. 5- Perfect Competition The highest degree of competition is found in a perfectly competitive market. This is an extreme type of market structure rarely found in the real world. In perfect competition, all buyers and sellers are price takers. In this case, buyers and sellers do not set the price of their product, but take the price as given. Prices are determined by the market. 5- Conditions Necessary for Perfect Competition For a market to be perfectly competitive, the following conditions must hold: First, products have to be standardized or homogenous so there is little difference between them. Second, sellers and buyers must be well-informed about what all the other sellers are charging. 5- Conditions Necessary for Perfect Competition Third, a market with perfect competition will have many sellers and many buyers. No buyer or seller is large enough to have an impact on the price. In national or global markets, buyers and sellers are in different parts of the country or the world. 5- Examples of Perfect Competition Most markets do not meet all three of the conditions necessary for perfect competition. But today’s economy is moving more toward perfect competition as more markets become global. Agricultural markets are . | Chapter 5 Competition and Market Power McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define perfect competition, and identify its key characteristics. Describe how businesses maximize profits in perfectly competitive markets. Discuss the long-term outcome of perfect competition. Compare and contrast the four types of market structure. Explain how market power affects price and quantity supplied. 5- The Role of Competition Competition plays a key role in a market economy. Companies are forced to deliver to the product that consumers want at the lowest cost. Competition in the market leads to more production, more innovation, lower costs, and higher living standards. 5- Perfect Competition The highest degree of competition is found in a perfectly competitive market. This is an extreme type of market structure rarely found in the real world. In perfect competition, all buyers and sellers are price takers. In this .
