Perfect Competition

Market Structure Economists classify markets based upon how competitive they are. Perfect Competition: the ideal model of a market economy. Real markets are never perfect; it is only used as a model. Economists assess how competitive a market is by comparing how close it is to the perfect competition model.

Characteristics of Perfect Competition Many Buyers & Sellers No one seller or buyer has control over the price. Many Sellers  buyers can choose to buy from a different producer if one tries to raise prices above market level. Many Buyers sellers are able to sell their products at the market price. Example: I want fresh raspberries, and all sellers charge about the same price. If one farmer increases his price, I will just choose to buy from another farmer.

Standardized Product Consumers consider one producer’s product to be essentially the same as the product offered by another. They are EXACTLY the same. They are perfect substitutes. Example(ish): raspberries Freedom to Enter & Exit Markets Producers are able to enter the market when it is profitable and exit when it becomes unprofitable. The investment that a producer makes to enter a market is relatively low. Example: Smith Raspberry Farm considers the market price for raspberries when they are planning their crops. If they believe they can make a profit at that price they will grow raspberries, if not, they will grow something else.

Independent Buyers & Sellers Buyers & Sellers cannot join forces to influence prices. Buyers & Sellers act independently, which allows for the forces of supply & demand to set the equilibrium price. Example: Smith Farm does not team up with Brown Farm, & Walker Farm to set the price. It happens naturally with S & D. Well-Informed Buyers & Sellers Both buyers & sellers are well-informed and make educated decisions. Buyers compare prices among different sellers. Sellers know what their competition are charging and what price consumers are willing to pay. Example: I know what all the farms in the area are charging for raspberries, I choose the ones that have market price.