The model of competitive markets relies on the following four core assumptions:

Question

The model of competitive markets relies on the following four core assumptions: 1. All firms sell identical products. 2. There many firms. In particular, there are enough firms that changes in an individual firm's output will not change the overall market price or the total quantity supplied. 3. Firms have free entry into and exit from the industry. New firms can enter the market easily, and existing firms can exit the market easily. 4. Firms are price takers. Pressure from competing firms forces them to accept the prevailing price in the market. Identify whether or not each of the following scenarios describes a perfectly competitive market, along with the correct explanation of why or why not. Perfectly competitive? Yes, meets all assumptions No, no free entry No, not many sellers Scenario Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. The price of the socks is determined in the market, and producers take this price as give. Several stores in the mall sell hooded sweatshirts. Each store's sweatshirts reflect the style of that particular store. Additionally, some stores use higher-quality cotton than others, which is reflected in the apparel's prices. The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug. In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed. No, not an identical product

Explanation / Answer

Ans:

Scenario - 1 Plain white stocks

Yes, meets all assumptions

There are many companies selling identical product and price is market determined which means companies are price takers.

Scenario - 2 hooded sweatshirts

No , not an identical product

In this case products are different in their quality and price and hence there is no identical product.

Scenario - 3 patent

No , no free entry

The limitation in this case is there is no free entry to all firms and hence it does not satisfy the core assumption of competitive market.

Scenario - 4 broadband internet access

No, not many sellers

Since there are only two sellers in the market it does not satisfy the core assumption of competitive market.

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