Topic 1: Special characteristics of purely competitive firms

1.
How does the investment banks...

Question

Topic 1: Special characteristics of purely competitive firms

1.
How does the investment banks industry fit into
the perfectly competitive model?

2.
Does pure competition, as a market model, have
any disadvantages for a) producers, and b) consumers? Give examples to
substantiate your response.

Topic 2: Analyze the conditions required for pure
competition to exist in the real world
1.
Is pure competition a "desirable"
market model for all industries? Should industries aspire for pure competition?
Why or why not?

2.
Think of an industry that does not function in a
purely competitive market currently. Describe the changes that would be
required, if this industry wanted to function under pure competition.

Robert · Accepted Answer

Topic 1: Special Characteristics of Purely competitive firms
A purely competitive market is characterized as a market with large number of 
buyers, large numbers of sellers with no one having enough market power of 
influencing market price, products are homogeneous, free entry and exit and there 
is perfect knowledge about the market conditions among the participants of the 
market.  
The main characteristics of this market and their implications can be explained as 
follows: 
1. Large number of seller: This is an important feature of perfectly competitive 
market. Sellers are in very large numbers in perfectly competitive market and this 
number is that much large that if one of them stops supplying product, it will not 
affect total supply of the product and hence will not have any impact on the market 
price. So firms in this market behave as price taker.
2. Large number of buyers: Buyers are also in very large number in perfectly 
competitive market and this number is so much large that even if one of them 
stops demanding the good, it will not affect market demand and hence will not have 
any impact on market price.
3. Homogeneous products: Products in this market are homogeneous in all 
respect, for example, they are homogenous in terms of name, quality, brand, 
packaging, size etc. So their price is also homogeneous and determined by the 
market.
4. No selling cost: Since products in this market are homogeneous and also there 
is uniformity in term of price as it is determined by market, so there is no need for 
selling cost or advertisement cost in this market. 
5. Free entry and exit: Here in this market, there are no barriers to entry and 
exit. Firms are free to enter and exit. Because of this feature, firms in this market 
always earn normal profit in the long run: if firms are making loss in the market, 
then in the long run some firms will leave the market which will reduce the market 
supply and thereby will increase the market price to the point where all the firms 
earn normal profit whereas if firms are making super normal profit in the short run, 
then in the long run more firms will enter the market which will increase the market 
supply and thereby will decrease the price to the level where all firms in the market 
earn just normal profit. Therefore each firm in the long run will earn normal profit. 
6. Perfect knowledge: In this market all the participants have perfect knowledge 
about the market. For example:

Topic 1: Special characteristics of purely competitive firms 1. How does the investment banks industry fit into the perfectly competitive model? 2. Does pure competition, as a market model, have any...

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