Chapter 23, Problem 1P

To determine

Why each of the following examples do not match the nature of a perfectly competitive industry?

a) One firm produces a large portion of the industry’s total output. However, there are many firms in the industry and their products are indistinguishable. Firms can easily exit and enter the industry.

b) There are many buyers and sellers in the industry. Consumers have equal information about firm’s product prices which differ moderately in quality from firm to firm.

c) Many taxi cabs compete in a city. The city’s government requires all taxi cabs to provide an identical service. Taxi cabs are nearly identical and all drivers must wear designated uniforms. The government also enforces a binding limit on the number of taxi cab companies that can operate within the city boundaries.

Concept Introduction:

Perfect competition: Perfect competition is a purely competitive market type where firms sell homogeneous and identical products. A key characteristic in this market is there are many buyers and sellers. Firms have the freedom to enter and exit the market at any time they wish. Market forces namely demand and supply determines the market price and the firm is a price taker. The consumers have full knowledge about the market situations and no single firm can alter the market price by changing their product’s price. The firms make supernormal profits during the short run and they can only make normal profits in the long run.