Aim: How do competitive markets affect free market economies?

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Presentation transcript:

Aim: How do competitive markets affect free market economies? Objective: SWBAT analyze competitive markets. Do now: Why do sport teams compete?

Perfect Competition The concept of competition is used in two ways in economics. Competition as a process is a rivalry among firms. Competition as the perfectly competitive market structure.

Competition as a Process Competition involves one firm trying to take away market share from another firm. As a process, competition pervades the economy.

Competition as a Market Structure Competition is the end result of the competitive process under highly restrictive assumptions. A perfectly competitive market is one in which economic forces operate unimpeded.

A Perfectly Competitive Market A perfectly competitive market must meet the following requirements: Both buyers and sellers are price takers. The number of firms is large. There are no barriers to entry. The firms' products are identical. There is complete information. Firms are profit maximizers.

The Necessary Conditions for Perfect Competition Both buyers and sellers are price takers. A price taker is a firm or individual who takes the market price as given. In most markets, households are price takers – they accept the price offered in stores.

The Necessary Conditions for Perfect Competition Both buyers and sellers are price takers. The retailer is not perfectly competitive. A store is not a price taker but a price maker.

The Necessary Conditions for Perfect Competition The number of firms is large. Large means that what one firm does has no bearing on what other firms do. Any one firm's output is minuscule when compared with the total market.

The Necessary Conditions for Perfect Competition There are no barriers to entry. Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market. Barriers sometimes take the form of patents granted to produce a certain good.

The Necessary Conditions for Perfect Competition There are no barriers to entry. Technology may prevent some firms from entering the market. Social forces such as bankers only lending to certain people may create barriers.

The Necessary Conditions for Perfect Competition The firms' products are identical. This requirement means that each firm's output is indistinguishable from any competitor's product.

The Necessary Conditions for Perfect Competition There is complete information. Firms and consumers know all there is to know about the market – prices, products, and available technology. Any technological advancement would be instantly known to all in the market.

The Necessary Conditions for Perfect Competition Firms are profit maximizers. The goal of all firms in a perfectly competitive market is profit and only profit. Firm owners receive only profit as compensation, not salaries.