Unit 2 Types of market: Perfect Competition

1. Theory issues revising

Exercise 17. Read the words for the texts and say, which terms are already familiar to you?

Vocabulary

stock market	фондовая биржа
foreign exchange market	FOREX market, FOREX, FX market , рынок иностранной валюты
to exert	приводить в действие
significant	значительный
fraction	доля, порция, часть
total output	валовый выпуск, общий объем производства
total supply	общий объем предложения
adjust	приспосабливаться
to be at the mercy of	быть в чьей-л. воле, милости
futile	бесполезный
to shrink	уменьшать, сокращать
obstacle	препятствие
to prohibit	запрещать
government regulations	правительственные постановления
criminal violence	преступное насилие
collusion	тайный сговор

Exercise 18. Read the following information. Can you state the basic characteristics of perfect competition?

Perfect Competition: Characteristics and Occurrence

As you already know, perfect competition involves a very large numbers of firms producing a standardized product and new firms can enter or exit the industry very easily.

Let's take a fuller look at defining characteristics of perfect competition:

• Very large numbers A basic feature of a perfectly competitive market is the presence of a large number of independently acting sellers, often offering their products in large national or international markets.

• Standardized product Perfectly competitive firms produce a standardized (identical or homogeneous) product. As long as the price is the same, consumers will be indifferent about which seller to buy the product from. Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A. Because perfectly competitive firms sell standardized products they make no attempt to differentiate their products and do not engage in other forms of non-price competition.

• "Price takers" In perfectly competitive market individual firms exert no significant control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker. It cannot change market price; it can only adjust to it. That means that the individual competitive producer is at the mercy of the market. Asking a price higher than the market price would be futile. Consumers will not buy from firm A at $2.05 when its 9999 competitors are selling an identical product, and therefore a perfect substitute, at $2 per unit. Conversely, because firm A can sell as much as it chooses at $2 per unit, there is no reason for it to charge a lower price, say, $1.95, for to do so would shrink its profit.

• Free entry and exit New firms can freely enter and existing firms can freely leave perfectly competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in any competitive market.

As subsidiary characteristics, it might be added that perfectly competitive markets are thought to be free markets in the sense of being free from government regulations and from criminal violence, competitive in absence of organized collusion or cooperation among buyers and sellers, and made up of firms whose primary goal is profit maximization.

Study questions:

1. Strictly speaking, perfect competition has never existed and probably never will. Then why study it?

2. Is perfect competition the most effective type of the market? Give your reasons.

3. Why does the government have to interfere in the market of competition? Will markets with high grade of competition need government regulations?