Topic 8. Model of firm on the pure competition market

Market price and volume of production on free competition market.

Competitive firm in the short run.

Competitive firm in long run.

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Purely competitive markets are used as the benchmark to evaluate market performance. It is generally believed that market structure influences the behavior and performance of agents with in the market. Structure influences conduct which, in turn affects performance.

Neoclassical microeconomics is an explanation of the behavior of individuals, firms, and organizations within a market context. Their behavior is thought to be a function of their objectives and the constraints that exist because of technology, quantity/quality of inputs and market structure.

Market structures can be characterized by sellers or buyers or both. Most economics texts classify markets by seller. Generally, they identify 4 basic types of markets; (1) pure (or perfect) competition, (2) monopolistic (or imperfect) competition, (3) oligopolistic competition, and (4) monopoly. Pure competition is believed to produce ideal results in the allocation of resources. Monopoly is usually depicted as having less than optimal outcomes.

Pure competition and Monopoly are at each end of the spectrum of markets. In fact, probably neither occur in market economies. Pure competition and monopoly are the boundaries and the “real world” (wherever that is) lies somewhere between the two extremes. Pure competition provides the benchmark that can be use to evaluate markets.

Characteristics of Pure Competition

The idealized purely competitive market insures that no buyer or seller hasany market power or ability to influence the price. The sellers in a purelycompetitive market are price takers. The market set the price and each sellerreact to that price by altering the variable input and output in the short run. Inthe long rung they can alter the scale of plant (size of the fixed input in eachshort run period). The conditions that ensure no seller has any market poseare:

(1) Large number of sellers (and buyers), no one of which can influence themarket.

(2) Homogeneous output, buyers see goods as perfect substitutes.

(3) Relatively "free" entry and exit to and from the market.

Sellers cannot charge a price above the market price because sellers see allother goods in the market as perfect substitutes. They can buy those goodsat the market price.