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Economics Lesson: Perfect Competition
Economics
Admin Admin
23-01-2016 07:53:00 +0000Perfect competition shows up quite often in the JAMB. It's important that you deeply understand this topic if you intend to attain a high score.
When several companies/businesses in the same industry each trying to maximize their profit. They are said to be 'competing' with each other.
But with so many types of industries, businesses and companies out there how does one recognize perfect competition?
Here's the official definition. Businesses (firm) are said to be in perfect competition if:
1) All firms sell an identical product
2) All firms are price takers - they cannot control the market price of their product
3) All firms have a relatively small market share
4) Buyers have complete information about the product being sold and the prices charged by each firm; and
5) The industry is characterized by freedom of entry and exit.
That sounds complicated but it's actually quite simple if we look at some real life examples.
Imagine a butcher that sells cow meat in the market. He will be competing against other people also selling cow meat (criterion #1). If he comes to work one day and sees everyone selling 1 kilo of meat for N1000 he knows he cannot sell his own for N2000 because no one will buy from him (criterion #2) - he must 'take' the market price. If he decides he has to travel to his village one weekend for a wedding his absence will have no effect on the price of meat in the market (criterion #3 & 5) - customers will just buy from someone else.
If the butcher doesn't offer his customers a good price they will just go to the next stall and ask how much they are selling - so the buyers have 'complete information' about prices (criterion #4)
Now compare this scenario with the cement industry in Nigeria. Do you think the cement industry in Nigeria is perfect competition?
image credit: http://www.digitaljournal.com
UPDATE - ANSWER INCLUDED BELOW
The person with the most accurate answer was @patty. @lilian is partially correct in that the buyers have complete information about the product being sold. But remember ALL 5 criteria must be met before it can be considered perfect competition. If even a single criterion is violated then it is NOT perfect competition.
In the case of the cement industry in Nigeria, a few of the criteria are NOT met.
1) There are not that many cement companies in Nigeria (roughly 10) because they are so few, it means that at least some of them have a large share of the market. And more importantly
2) Dangote cement controls well over 50% of the cement market in Nigeria . This violates criteria 2 and 3. If they decide to stop selling cement tomorrow, the supply of cement will drop and will likely make the market price go up due to shortage.
Thanks to everyone that participated in this discussion. Most of the responses have helped to shed light on this very interesting topic.
REMINDER
Remember if you want lessons on economics to follow the 'economics' subject. Go to the main menu then 'subject forums' -> Economics
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Google Test
I think that the cement industry in Nigeria is not in a perfect competition since we have just a few cement industry operating in the country. In some states some people have never heard of some cement companies like Portland, unicem and many others. The only cement company that is widely known is dangote, if this is the case then in some states, sellers are liable to gamble with the price and they end up taking a large market share.
0 24-01-2016 06:57:00 +0000
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Abiola Damilare
all the above are the features of a perfect competitive market
0 24-01-2016 14:40:00 +0000
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