Question

Explain how each of the assumptions of perfect competition contributes to the fact that all decision makers in perfect competition are price takers.

Answer 1

Ответ:

Perfect competition is a market structure in which a large number of small firms compete with each other to sell homogeneous products to a large number of buyers. In perfect competition, all decision makers are price takers, meaning they have no control over the price of the product they sell or buy. This is due to the following assumptions of perfect competition:

1. Homogeneous products: In perfect competition, all firms sell identical products, and buyers have no preference for one seller over another. This means that buyers will always choose the seller with the lowest price, and sellers cannot charge a higher price without losing customers.

2. Large number of buyers and sellers: In perfect competition, there are many buyers and sellers in the market, and no single buyer or seller has enough market power to influence the price. This means that each buyer and seller is too small to affect the market price, and must accept the prevailing market price.

3. Perfect information: In perfect competition, all buyers and sellers have perfect information about the market, including the prices charged by all other buyers and sellers. This means that buyers will always choose the seller with the lowest price, and sellers cannot charge a higher price without losing customers.

4. Free entry and exit: In perfect competition, there are no barriers to entry or exit from the market. This means that new firms can enter the market if they see an opportunity to make a profit, and existing firms can exit the market if they are making losses. This ensures that the market remains competitive, and that no single firm can dominate the market and influence the price.

Together, these assumptions ensure that all decision makers in perfect competition are price takers, as they have no control over the price of the product they sell or buy. Each buyer and seller must accept the prevailing market price, and cannot charge a higher price or pay a lower price without losing customers or suppliers.

Объяснение:

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Answer 2

The four main assumptions of perfect competition all play a crucial role in making all decision makers in this market model "price takers." Let's break down each assumption and its impact:

1. Many Firms:

• Reasoning: With a large number of firms selling identical products, no single firm has a significant market share. This means they cannot individually influence the market price by adjusting their output.
• Impact: Each firm is simply a small player in the market, unable to move the market needle. They must accept the prevailing price set by the aggregate forces of supply and demand.

2. Homogeneous Products:

• Reasoning: All firms offer the same product, making individual firms indistinguishable to consumers. There's no brand loyalty or preference for one firm over another.
• Impact: Consumers are indifferent to which firm they buy from as long as the price is the same. Firms cannot charge a premium based on product differentiation, forcing them to accept the market price.

3. Free Entry and Exit:

• Reasoning: There are no barriers to entering or exiting the market. Any firm can start producing the good if they believe they can make a profit, and they can leave easily if they are not profitable.
• Impact: This constant threat of new competition keeps existing firms in check. If a firm tries to raise its price above the market level, new firms will enter the market and drive the price back down.

4. Perfect Information:

• Reasoning: All firms and consumers have complete and accurate information about the market, including prices, costs, and production technologies.
• Impact: With perfect knowledge, firms cannot exploit any information asymmetry to their advantage. They cannot charge higher prices based on consumer ignorance, as consumers are aware of the market price and will shop around for the best deal.

These four assumptions combined create a market environment where no single firm has enough market power to influence the price. Each firm is essentially a price taker, forced to accept the equilibrium price determined by the market forces. They can only control their own production and cost structure, but not the price at which they sell their goods. This ultimately leads to a highly competitive market with efficient resource allocation and low prices for consumers.