In a perfectly competitive market, an increase in market price shifts the marginal revenue curve1/19/2024 A firm with market power chooses a point on the demand curve that it faces. You might think this greatly weakens the usefulness of the supply-and-demand framework. In most markets, firms possess some market power, meaning that the demand curve they face is not perfectly elastic. Such examples notwithstanding, the vast majority of markets are not perfectly competitive. Markets for certain financial assets are another. Markets for commodities, such as wheat or gold, are one example. There are certainly some markets that fit these criteria. Each buyer and seller must be “small” relative to the market, meaning that they cannot influence market price. There also must be a large number of buyers. For a market to be perfectly competitive, there must be a large number of sellers of an identical product. Yet the conditions for perfect competition are quite stringent. How can I predict what will happen to prices when markets are not competitive?Įverything that we have discussed in this chapter applies, strictly speaking, only to perfectly competitive markets.
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