Reading

Date: 2015-10-07; view: 392.

Discussion

Work in pairs.

Using the key vocabulary that you have made in the previous task, discuss what you

have learned about perfectly competitive markets and the theory of perfect competition.

1,Skim through text 33 and think of the suitable title.

TEXT 33

Because firms in perfectly competitive markets produce identical products and face a given market price, the essence of the theory is that producers do not recognize any competitiveness among themselves; that is, no direct competition among firms exists. Therefore, the theoretical concept of competition in these markets is diametrically opposed to the generally accepted concept of competition. We could say that the automobile industry or the personal computer industry is quite competitive since each firm in these industries must consider what its rivals will do before it makes a decision about advertising campaigns, design changes, quality improvements, and so forth. However, that type of market is far removed from the theory of perfect competition, which permits no personal rivalry. ("Personal" rivalry is personal in the sense that firms consider the reactions of other firms in determining their own policy). In perfect competition all economic magnitudes are determined by impersonal market forces. Several important conditions define perfect competition:

1. The product of each firm in a perfectly competitive market is identical to the product of every other firm. This condition ensures that buyers are indifferent as to the firm from which they purchase. Product differences, whether real or imaginary, are precluded under perfect competition. Thus, the market is characterized by a homogeneous (or perfectly standardized) commodity.

2. Each firm in the industry must be so small relative to the total market that it cannot affect the market price of the good it produces by changing its output. If all producers act together, changes in quantity will definitely affect market price. But, if perfect competition prevails, each producer is so small that individual changes will go unnoticed. Neither is any individual firm able to affect the price of any input by its usage of that input. Again all producers could, under certain conditions, change their usage of an input and affect its price. In other words, the actions of any individual firm do not affect the market supply of the product produced or the market demand for any input.

3. There exists unrestricted entry and exit into and out of the industry. Hence, there can be no artificial restrictions on the number of firms in the industry. New firms do not require huge amounts of capital equipment and investment to enter perfectly competitive industries.

4. Each firm has full and complete knowledge about the product and the market. Thus each firm knows the best - least cost - method of production, the price of output, and input price. Even potential entrants know whether or not firms in the industry are making economic profits. This assumption of complete information is made for analytical convenience only and is not necessary for the development of the theory.

2. Comprehension check.

Working in pairs, answer the questions:

a) What is the concept of perfect competition?

b) What conditions are essential for perfect competition?

Discussion

Working in pairs, discuss what you have learned about characteristics of perfect competition.