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Elasticity. Perfectly competitive market

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Kate Maslova

on 11 April 2013

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Transcript of Elasticity. Perfectly competitive market

Perfectly Competitive Market A purely competitive market exists when the following conditions occur:
Low entry and exit barriers - there are no restraints on firms entering or exiting the market
Homogeneity of products - buyers can purchase the good from any seller and receive the same good
Perfect knowledge about product quality, price, and cost
No single buyer or seller is large enough to influence the market price ( called Price Takers ) Availability of Close Substitutes
Necessities versus Luxuries
Definition of the Market
Time Horizon What influences the price elasticity of demand - How is it possible that a firm in a perfectly competitive market is able to sell all it wants without having to change the price?

- What does this tell about the elasticity of demand faced by the firm? Questions The price elasticity of demand measures how much the quantity demanded responds to a change in price.
There are 2 types of elasticity: elastic and inelastic.
The price elasticity of demand for any good measures how willing consumers are to buy less of the good as its price rises. Elasticity of Demand Demand in a Perfectly Competitive Market The demand and supply curves for a perfectly competitive market are illustrated in Figure 1 (a); the demand curve for the output of an individual firm operating in this perfectly competitive market is illustrated in Figure 1 (b). Note that the demand curve for the market, which includes all firms, is downward sloping, while the demand curve for the individual firm is flat or perfectly elastic, reflecting the fact that the individual takes the market price, P, as given. Conclusions
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