Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36 Firms In Competitive Markets
Section 3 of 24
…
What is a competitive market?
A competitive market has three characteristics
· there are many buyers and many sellers
· the products offered by the many sellers are the same or very similar
· firms can freely enter or exit the market
As a result the actions of any single buyer or seller in the market have little or impact on the market price.
Each buyer and seller takes the market price as given.
…
No single consumer of milk can influence the price of milk because each buyer purchases a small amount relative to the size of the market.
Each dairy farmer has no control over the price of milk because many other suppliers are selling the same product.
Because any producer can sell all it wants at the going price it has little reason to charge less.
If a producer charges more, buyers will buy from other suppliers.
…
Buyers and sellers in competitive markets must accept the price the market determines and therefore are said to be price takers.
Firms can freely enter or exit a competitive market.
Anyone can decide to start a dairy farm.
Any existing dairy farmer can decide to leave the dairy business.
… …

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