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Free «Understanding the Economy» Essay Sample

Perfectly competitive markets are idealized versions of the market structure and provide the best foundation for understanding how markets work in a capitalist economy. It is referred by Begg, Fischer and Dornbusch’s economics book that a firm in a perfectly competitive market face a flat or horizontal demand curve and that regardless of the quantity sold by a firm, it gets just the market price (D. Begg, 1991). The book also states that if in any case the firm attempts to charge more than the prevailing market price; it does not sell any output. It acts as a standard of reference that makes the other market structure easy to understand. Perfect completion is referred to as the impersonal nature of this market by economists.

This market model is based on the assumptions that identical goods are produced by large number of firms, are consumed by large number of buyers, it is easy for firms to enter and exit the market and that buyers and sellers have perfect knowledge of the market conditions. Firms in a perfectly competitive market are price takers in the sense that they set a given production level in accordance to the determined market price (Foss, 1997). The firm tends to change its production decisions with a change in the market price. The firm’s short run marginal cost is therefore its supply curve.


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A firm operating in a perfect market faces various barriers. The high start up costs hinders firms to enter the market fast hence rendering the market less competitive at this period. The market faces less threat since new firms are rather reluctant to consider new alternatives. Government restrictions are also barriers that hinder the competitors to contest the market.

There is homogeneity of products produced since they are identical making consumers not to choose from which seller to buy from. The best examples to illustrate this are wheat and corn which are grown by different farmers. The existence of many buyers and sellers makes the effect of one individual almost insignificant since they cannot influence the market price (Sloman, 1947). The outcome of this is that buyers and sellers have no option than to accept the set market price they only decide on the amount of goods to purchase or sell since the market establishes its own price as a whole. Firms in a perfectly competitive market depend on the market structure in order to determine how much to produce or charge.


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