Economics Introduction
Explain how economic systems attempt to allocate and make effective use of resources.
Because we live in a world where resources are scarce economic systems make use of market structures such as the perfectly competitive market model as a benchmarking tool in order to better understand consumer behaviour and recognise areas of their market structures that require improvement and how they could possibly achieve this in the most efficient and effective way.
The theory of perfect competition is based upon five pre conditions namely: Homogenous product. All the firms within a industry sell the same product. Consumers have no reason to prefer one seller’s product to that of another seller. For example: Farmers selling peas on a weekend market.
Absence of artificial constraints. Any new firm is free to enter the industry and start producing/offering services, just as existing firms are free to stop producing/ offering services and exiting the industry. No legal barriers fixing prices within the industry exist and existing firms also have no power to fix prices either. For example: The existing pea farmers could not prevent new farmers from planting peas and selling them in the market.
Perfect knowledge. Customers have perfect knowledge regarding the products being sold and the prices being charged by all the firms in the industry. For example: Customers know that all the peas the farmers sell on the market are of the same kind, quality and how much each of them charge for it.
Many buyers and sellers in the market. No seller or buyer is able to affect prices within the industry. If one seller exists the industry the total supply would not decrease enough to cause a price change. Single buyers also do not have the power to affect prices with their purchase quantities. For example: If one of the pea farmers in the industry decides to start planting and selling corn instead of peas the price of peas within the industry would not be affected. The same when
Because we live in a world where resources are scarce economic systems make use of market structures such as the perfectly competitive market model as a benchmarking tool in order to better understand consumer behaviour and recognise areas of their market structures that require improvement and how they could possibly achieve this in the most efficient and effective way.
The theory of perfect competition is based upon five pre conditions namely: Homogenous product. All the firms within a industry sell the same product. Consumers have no reason to prefer one seller’s product to that of another seller. For example: Farmers selling peas on a weekend market.
Absence of artificial constraints. Any new firm is free to enter the industry and start producing/offering services, just as existing firms are free to stop producing/ offering services and exiting the industry. No legal barriers fixing prices within the industry exist and existing firms also have no power to fix prices either. For example: The existing pea farmers could not prevent new farmers from planting peas and selling them in the market.
Perfect knowledge. Customers have perfect knowledge regarding the products being sold and the prices being charged by all the firms in the industry. For example: Customers know that all the peas the farmers sell on the market are of the same kind, quality and how much each of them charge for it.
Many buyers and sellers in the market. No seller or buyer is able to affect prices within the industry. If one seller exists the industry the total supply would not decrease enough to cause a price change. Single buyers also do not have the power to affect prices with their purchase quantities. For example: If one of the pea farmers in the industry decides to start planting and selling corn instead of peas the price of peas within the industry would not be affected. The same when
Bibliography: ❑ Lipsey, Courant, Ragan (1999). Microeconomics. 12th ed. United States of America: Addison-Wesley. 211-229. ❑ Lipsey, Courant, Ragan. (1999). Imperfect Competition. In: Lipsey, Courant, Ragan Microeconomics. 12th ed. United States of America: Addison-Wesley. 257-259. ❑ Lipsey, Courant, Ragan. (1999). Imperfect Competition. In: Lipsey, Courant, Ragan Microeconomics. 12th ed. United States of America: Addison-Wesley. 239,259-271.