Pure Competition

Summary:

Pure competition is one of four market structures in which thousands of firms each produce a tiny
fraction of market supply in their respective industries.  Examples: farm commodities (wheat, soybean,
strawberries, milo), the stock market, and the foreign exchange market .

- A market characterized by large number of independent sellers of standardized products, free

flow of information, and free entry and exit. Each seller is a “price taker” rather than a “price
maker”.

Ex: Queen Victorian Market

Characteristics

Ver y large numbers – a large number of independently acting sellers who offer their products in large
markets like larger national or international markets. Ex: farm commodities, thee stock market, the
foreign exchange market.

Standardized product – firms produce a product that is identical or homogenous. As long as the price is
the same, consumers will be indifferent about which seller to buy the product from. The producer would
not lower the price, since it will not earn anything by shrinking its profit, because the firms sell
standardized products, they make no attempt to differentiate their products and do not engage in other
forms of nonprice competition and any changes made to a product would result in a unified change
throughout all firms because one major characteristic of pure competition industries is that there is
perfect knowledge of the product.

Price taker – the firm cannot change the market price, but can only accept it as “given” and adjust to it.
Individual firms exert no significant control over product price, which each firm produces such a small
fraction of total output that increasing or decreasing its output will not perceptibly influence total
supply or product price. The individual competitive producer is at the mercy of the market.

Free entr y and exit – no legal, technological, financial, or other obstacles that prevent firms from
entering or leaving a competitive market. It is easy for firms to enter or exit the industry(especially small
economies of scale). NO barriers to entry exist.

This is only possible in a purely competitive market because firms in this type of market are “price
takers,” and the number of firms does not affect the price of a product. This characteristic is key in
determining that in the long-run, firms have no economic profit, as the price would eventually equal
minimal ATC(average total cost).

Advantages

Pure competition is that everyone has a chance to play the game; In other words, capitalism is rampant,
and it’s every person for his or herself. Businesses may sprout up at any time and then challenge the
biggest conglomerates in the world. With pure competition, the government stays out of business affairs
and lets them run their own course, so entrepreneurs aren’t shackled by red tape, unfair taxation, ad
endless rules and regulations.

Disadvantages

Pure competition is that large, already established companies, such as multinationals, swim the oceans
of commerce like great white sharks, gobbling up smaller companies against millions or billions of dollars
in corporate clout. In fact, big companies may often go too far in their quest

Rational Consumers- Rational choice theory states that individuals rely on rational calculations to
achieve outcomes that are in line with their personal objectives. These decisions provide people with
the greatest benefit or satisfaction — given the choices available — and are also in their highest self-
interest.