Chapter 9.1, Problem 1R

To determine

To state: The importance of market structure and perfect competition.

Explanation of Solution

Market structure has a great importance in economics. It governs the nature and scope of competition in the market for products and allied services. There are number of factors on which the market structure depends namely: number of buyers and sellers, entry- exit barriers in the market, nature of the product, etc. Before any decision making, a detailed market analysis is conducted to get the required information which in turn, is used to determine the market structure in which the product will enter.

One such market structure is Perfect competition.

Perfect competition is the market where are huge number of buyers and sellers are in trade of homogeneous products.

Perfect competition holds benefits in several ways:

1. There are no entry and exit barriers which means that when the industry is earning profits, some new firms can enter the market lured by such profits without any restrictions and at the same, if the industry is facing losses, the firms are easily allowed to leave the market.
2. There is no need for the firms to incur advertising cost since the products are homogeneous. The prices are usually decided by the market forces and the sales will automatically happen at such prices.
3. In this market, consumer is the king. Since there are large number of sellers, so consumers can easily shift from one to another, if not satisfied with the products and services. So, just to maintain the customer base and not lose their revenues, customer satisfaction is considered as the top most priority for any firm under a perfectly competitive market.

Economics Concept Introduction

Introduction: Market structure governs the nature and scope of competition in the market for products and allied services. Perfect competition is defined as the market structure where there are huge number of buyers and sellers.