We begin with the first type of market structures, the extreme end of the spectrum in terms of how perfect the market can be, the Perfect Competition market structure. We now build upon the foundation of consumer and firm behavior with respect to the dynamics of demand versus supply.
By definition, a Perfect Competition market structure is one where the participants are not powerful enough to set the prices for a homogenous product. It competes in the sale of a homogenous good and can only sell at one price, which is the equilibrium price determined by the clash of demand and supply. And because information mobility is assumed to be perfect, it is given that all the players, sellers and buyers, are aware of this equilibrium price.
Do you remember hearing the words “free market” back in secondary school? You would encounter it in social studies where our textbooks would tell us that governments and unions are striving towards a “free market” as that would benefit businesses and consumers. Have you ever asked yourself why this would benefit everybody?
The notion of a “free market” also means that buyers and sellers are free to enter or leave the market at their own discretion and without any barriers to entry. The influx of competitors would then affect the cost of production because of the increase in demand for production materials such as labor, capital, etc.
The question of why a perfect market would benefit society is answered with the concept of allocative efficiency, which is concerned with general equilibrium in the later chapters of this unit and Quickienomics will be covering that topic when the time comes.
I hope you enjoy the study of market structures because it has given me much insight to the business world, a dog-eat-dog world where only the fittest survive!
At the end of this video, you should be able to:
Approach to Graph Dynamics (2 sellers/2 buyers):
***Be flexible with the approach as this is only the basic model of how the question should be answered. Always be alert as there might be new scenarios thrown at you.
Some extra stuff: