Economics for buisness Essay Example | Topics and Well Written Essays - 2500 words

Economics for buisness - Essay Example The market has various structures under which firms operate. A market structure is the method or system wherein "the suppliers and demanders in an industry interact to determine price and quantity (Deardorff, 2001)." There are four main market structures: perfect competition, monopoly, oligopoly, and monopolistic competition. The categorization is based on the extent and characteristics of competition in the market that affects the behavior of both the buyers and sellers (Fischer). One consideration in analyzing market structures is how the price of a particular product affects the quantity demanded of the product. The relationship between the price of a product and the quantity demanded is measured by the price elasticity of demand (PED). A perfect (pure) competition is a market wherein potential and actual buyers and sellers are so many that both market players have very limited individual influence in the market. Because of the huge number of participants in this market structure, individual producers and consumers are heaviliy dependent on the market forces and mechanisms. A perfect competion has di... The second character of a perfectly competitive market is that firms are price takers. This means that no single firm can affect the price. Because of the numerous firms that produce and sell an identical product. Their number makes their influence insignificant. Buyers of this product are also many. Consumers have the information regarding the prices that all sellers in the market charge. This makes consumers sensitive to the changes in price. If one firm raised the price of its product, buyers can easily switch to another firm's product, which is, as mentioned above, a perfect substitute. All firms are assumed to have equal access to resources and improvements in production technologies achieved by one firm can spill-over to all the other suppliers in the market. No one is assumed to be privileged when it comes to acess to technology and other factor inputs. Another notable quality of perfect competition is its freedom of its firms to enter in and exit from the market in the long run. This means that the market is open to competition from new suppliers. The existence and the absence of an individual firm does not affect the overall market. Price Elasticity of Demand in Perfect Competition In a perfect competition, the demand curve is perfectly elastic. This means that a change in price of a good in this market structure will greatly affect the quantity that consumers demand. As mentioned above, any increase in price will cause the demand for the product to fall. If one internet service provider raises its price, customers will find another firms that provide the same, standard product. Features of Perfectly competitive market With the mentioned qualities above, a