INDIVIDUAL HOMEWORK № 1
1. Read the text and decide whether these statements are true or false.
1. Market structure describes how competitive a market is.
2. Perfect competition and pure monopoly are opposites.
3. Four conditions are necessary for perfect competitions to exist.
4. In perfect competition, every company makes a slightly different product.
5. Perfect competition makes it easy for new companies to start trading.
6. When there is perfect competition, companies are able to set any price they
Market structure and competition
When economists talk about market structure they mean the way
companies compete with each other in a particular market. Let’s take the
market for pizzas, for example. There may be many thousands of small
companies all trying to win a share of the pizza market, or there may be only
one huge company that supplies all the pizzas. These are two very different
market structures, but there are many other possible structures. Market
structure is important because it affects price. In some market structures,
companies have more control over price. In other market structures,
consumers have more control over price.
You can think of market structure as a kind of scale. At one end of the
scale is perfect competition and at the other end is pure monopoly. In a
market with perfect competition, there are many companies supplying the
same good or service, but none of them are able to control the price. This
sounds fine, but in reality it is very difficult for such a market structure to
exist. What’s needed?
First of all, there must be many small companies competing. Each
company has its own small share of the market. If one company has a much
larger share than any other, it can affect price, and perfect competition will
no longer exist.
Secondly, products or services from different companies must be the
same. This doesn’t mean that every thing on the market has to be identical,
but they have to be perfect substitutes. In other words, one company’s
product must satisfy the same need as another company’s. Imagine a
company produces a television that also makes tea. Its product is different
from everyone else’s. If it chooses to raise the price of its TVs, customers
may still want to buy them because of this difference.
Thirdly, customers and companies must have perfect and complete
information. This means that they know everything about the products and
prices on the market and that this information is correct.
Fourthly, there mustn’t be any barriers to new companies entering the
market. In other words there must not be anything that helps one company
stay in the market and blocks other from trading.
Finally, every company in the market must have the same access to the
resources and technology they need.
If all of these conditions are met, there is perfect competition. In this
kind of market structure, companies are price takers. This is because the laws
of supply and demand set the price, not the company. How does this work?
Very Simply! An increase in demand will make a company increase its price
in order to cover costs. It might try to push its prices even higher than
necessary so that it can make more profit. However, it will not be able to do
this for very long. The increase in demand and the higher price will make
other companies want to enter the market, too. This will drive the price back
down to equilibrium.