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A Perfectly Competitive Market And The Housing Industry

1419 words - 6 pages

What is a perfectly competitive market? A perfectly competitive market is defined as something that occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there are no impediment to the entry or exit of firms, and when full information is available (Baumol and Blinder, 200). In other words, when competition is at its greatest possible level, it describes a market structure in a perfect competition. A perfect competitive market consists of many buyers and sellers and therefore each buyer or seller is a price taker. All sellers tend to supply the same identical product. When four conditions are satisfied, a market is said to operate under ...view middle of the document...

Should there be more or less houses being built, or stop building them all together, then the housing market takes notice, therefore likely causing the price and quantity exchanged to change.
Second, homogeneity of product is defined as the product offered by any seller is identical to that supplied by any other seller. Because products are homogeneous, consumers do not care from which firm they buy, so competition is more powerful (Baumol and Blinder, 200). For instance, products are identical and therefore the consumer cannot tell the difference if the product came from one producer or another; in this market advertising is not present. In other words, buyers are unable to tell which firm produces a given product, for there are no brands or any distinguishing features. This feature means that all perfectly competitive firms tend to produce goods that can be perfect substitutes for other firms’ output. Therefore, if a price is received from a firm the other firm will be unable to change the price, but if they were to attempt to charge a higher price, then the buyers would go to other goods that are perfect substitutes. Moreover, many houses in the housing market are unique in many ways. The value houses can depend on their location, their model, and their uniqueness, which can indicate the quality, good or bad, that the buyers have for this product. To most buyers all houses are not the same, for they have different materials, different uses, different quality, etc.
Next, freedom of entry and exit is defined as new firms desiring to enter the market face no impediments that previous entrants can avoid, so new firms can easily come in and compete with older firms; similarly, if production and sale of the good prove unprofitable, no barriers prevent firms from leaving the market (Baumol and Blinder, 200). In other words, if a firm is making profits, then there tends to be new firms that enter the market. Perfectly competitive firms are not restricted by rules and regulations, startup cost, or other barriers to entry by the government. Under different conditions of circumstances, some firms will leave the market for, they are not prevented from leaving. In a perfectly competitive industry, the firms can secure control, possession, or become the owner of whatever labor, capital, and other resources that they may need without having to deal with restrictions or any type of delay. For example, when houses entered the market it needed to build several more houses, spend a lot of money on advertising, and obtain approvals. Since many buyers are looking for homes and need a place to live the housing market will most likely not stop building.
In addition, perfect information is defined as each firm and each customer is well informed about available products and prices; they know whether one supplier is selling at a lower price than another (Baumol and Blinder, 200). For instance, it is assumed that the consumers and producers have perfect...

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