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DA4. Perfect Competition

Statement

Consider the following goods and services. Which are the most likely to be produced in a perfectly competitive industry? Which are not? Explain why you made the choices you did, relating your answer to the assumptions of the model of perfect competition. Please address all of the examples below in your discussion.

  1. Coca-Cola and Pepsi.
  2. Potatoes.
  3. Private physicians in your local community.
  4. Government bonds and corporate stocks.
  5. Taxicabs in Lima, Peru—a city that does not restrict entry or the prices drivers can charge.
  6. Oats.

Answer

A perfectly competitive market where the interaction between supply and demand in the market determines the price of the good or service. Such a market has a set of characteristics that make it possible such as large number of buyers and sellers, identical products, perfect information available to all market participants, no barriers to entry or exit, and everyone is a price taker (Rittenberg & Tregarthen, 2009).

In real life, no market is perfectly competitive as those characteristics are hard to achieve. However, some markets are closer to perfect competition than others. To determine how likely a good is to be produced in a perfectly competitive industry, we need to consider the characteristics of the market and the good and compare them to the assumptions of perfect competition.

Coca-Cola and Pepsi are NOT likely to be produced in a perfectly competitive industry. The two products are branded which violates the identical products assumption; there are a few big players in the market that dominate the industry and make entry requirements higher; especially the amount of advertising and marketing required to make the first step.

Potatoes are likely to be produced in a perfectly competitive industry. All potatoes are (of the same type) are identical in the eyes of the end consumer regardless of how and where it was produced. Barriers to entry are low, and there are many producers and consumers.

Private physicians in your local community are NOT likely to be produced in a perfectly competitive industry. Each physician provides a unique service; the barrier to entry is hard behind a medical degree and the required licensing; information are not generally available to public; and governments often regulate the prices of medical services.

Government bonds and corporate stocks are NOT likely to be produced in a perfectly competitive industry. Each stock or bond represents a unique company thus products are not identical. While, information is available and entry barrier is not that high, the market is heavily regulated by the government.

Taxicabs in Lima, Peru are likely to be produced in a perfectly competitive industry. The entry barrier is low as the city does not restrict entry or the prices drivers can charge. There are many drivers and consumers and price information is available to all. However, there may be still some room for providing a unique service, such as a better car, or air conditioning that may differentiate one driver from another.

Oats are likely to be produced in a perfectly competitive industry. Similar to potatoes and other agricultural products, all oats are identical products, information is available to all, and there are many producers and consumers.

To summarize, the most likely goods to be produced in a perfectly competitive industry are potatoes, oats, and taxicabs. The least likely goods are Coca-Cola and Pepsi, private physicians, and government bonds and corporate stocks.

We conclude that goods agricultural goods that are available to the masses are more likely to be produced in a perfectly competitive industry than goods that require skills and targeted marketing to produce and sell. The more widely-used and necessary a good is, the more likely it is to be produced in a perfectly competitive industry.

Word count: 530.

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