Perfect Competition Part 1 Transcript, AI Summary & Key Points

00:02 we've given some thought to Consumer demand how consumers behave we've given some thought to suppliers costs of production so we're now in a position to begin to examine how market prices are set and we'll see that the way in which market prices are determined is dependent upon the market structure within which firms operate we wouldn't expect prices in an agricultural Market where there are large numbers of small firms to set prices in the same way that prices are set in an industry where there are just say a few very

00:42 large firms we'll look at four Market structures the First Market structure a very important one is perfect competition this is a market structure where there are large numbers of firms all of them small relative to the size of the total market and it's a market where it's relatively easy for new firms to join or leave the industry at least it is in the long run remember in the short run the level of capital can't be altered and puffy competition is a market where all firms produce the same product it's a homogeneous

01:29 product it's undifferentiated when economists are looking around for examples of perfect competition they often choose agriculture it's not difficult to understand why perfect competition requires large numbers of producers and in many countries that's exactly what you get in the farming Community but it also requires an identical product one farmers onions very much like another Farmer's onions so as a result you've got a situation in which you've got a large number of producers producing an identical product and

02:08 therefore no individual producer no individual farmer has control over the market price the price is set by the interaction of supply and demand actually what we find is that in some societies agriculture is becoming less and less a good example because units are getting bigger and bigger and agry business dominates the market but here in Poland we've got a a very good example of perfect competition because we have large numbers of still very small producers and we're going to see shortly that one of the implications

02:46 of this kind of Market is that the firm has no control over price I'm interested in how the prices get set who decides how much they get paid um it's not it's not the settle price someone that buys basically tells the price abely does it veryy very much and they say from week to week there are really huge actually difference in the prices do do do you know why these prices vary so much from week to week right now there is quite all right price because it's 450 per kilogram the RO price is like 3 50 when it's really

03:31 really low so the difference is quite big it's from 350 to right now it's 450 that's a that's a big difference prices are determined by supply and demand the producer has to accept the price that the market gives and simply make a decision about how much output to produce then we'll be looking at a market structure that we call monopolistic competition I monopolistic competition is the kind of Market structure where you have a fairly large number of firms producing a somewhat differentiated product therefore different

04:14 prices and also relatively easy entry and exit into and from the industry the High Street provides some good examples of this kind of Market structure Bakers chemists Etc where there's a large number of stores all selling pretty much the same commodity but where they try to differentiate the product in order to retain some control over price the key difference is in the nature of the product we're going to have a number of firms freedom of entry into the industry being easy but it's a market where each firm is able to

05:01 make its product a little bit different from others so we might think about restaurants there are many restaurants in town they all sell pretty much the same thing food but the decor is different the chef is different the menu is different so each firm can differentiate its product even though it operates in a market Market where there are many firms and it's easy for new entries to come in that means that the firm will have some control over its price if you're in a restaurant and you raise your price a bit you're

05:47 going to lose some of your custom but some people will particularly like your restaurant particularly like the decor particularly like the food and so demand for your product won't disappear entirely but you will tend to have a relatively elastic [Music] demand having thought about that kind of Market structure we'll then look at a very different Market that which we call oligopoly oligopoly is a market which will be dominated by just a few large producers and in these markets entry in into the market is restricted in

06:29 various ways it's difficult for new firms to join the market generally speaking the product will be differentiated in some way there are many markets of which we can think here cars a few large producers selling a differentiated product but it's difficult for new car firms to enter the market petroleum Banks Pharmaceuticals Airlines many examples of oligopoly these firms will face a downward sloping demand curve with a relatively inelastic demand in many cases because the nature of the product can be really quite

07:22 differentiated a Rolls-Royce car is very different from a Ford and finally we'll look at the fourth and last structure that we're going to be interested in Monopoly Monopoly is where there is just one firm mono Greek one usually in this kind of Market there are very high barriers to the entry of new firms it's very difficult for another firm to be able to compete with the existing monopolist so of course the nature of the product is unique now there aren't many markets where there is no competition but there's an

08:04 element of Monopoly in lots of Industries for example the Orizon bridge between Denmark and Sweden is a monopoly if you want to drive your car you'll have to pay the monopolist for the privilege some train companies have monopolies local water utilities are monopolies there are no close substitutes for water some electricity utilities are monopolies and this means that the firm faces a downward sloping demand curve often relatively inelastic the monopolist has considerable control over the price