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Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market

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Introduction

Explain how the equilibrium level of output is determined in perfect competition. Both for the whole market and one firm within the market: The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. Perfect competition describes a market in which no buyer or seller has market power. Such markets are usually allocatively and productively efficient. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products. The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively easy for a firm to enter or exit the market. ...read more.

Middle

The reality is that most markets are imperfectly competitive. Discuss the view that developments in information technology such as the internet made markets more competitive? Developments in information technology have without doubt made markets more competitive (although not in all sectors). The arrival of the internet has removed many barriers to entry. As, vitally, there are very little start up costs in starting an online business. There is no need to purchase, rent or lease premises, employ several members of staff, pay electricity, gas, water etc bills. In some cases, there is not even a need for the online firms to purchase and store or keep stock, which eliminates a great deal of risk - this leads into another concept in which the developments in information technology and the internet have made easier, which is arbitrage. Arbitrage is the making of a gain through trading without committing any money and without taking a risk of losing money. Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk.So to look at it in the perspective of a potential online business, there is no need to spend money on land utilities and labour and there is a possible chance of the business not even having to risk buying stock before it's sold. ...read more.

Conclusion

An online business has no or significantly less transaction costs. This had made markets alot more competitive as online firms are able to provide there products cheaper than they are in shops. Developments have also introduced new kinds of retailers, like Amazon who have different business structures. However, the internet has also put great strain and eroded some markets. Businesses such as Antique shops have been put out of business due to the internet and internet auction sites such as eBay. People are able to sell there antiques from the comfort of there own and homes and perhaps even make more money selling online as opposed to taking it to there antiques dealers (this leads in with transaction costs). The most notable change in an industry is the music industry. The music industry has seen a huge slump with the development of the internet and the introduction of music downloads which has had a severe affect on shops and the artists themselves, as a lot of downloading is done illegally, which is free. So the internet has effectively allowed us obtain (although illegally) a product which a consumer would pay �10-�15, for free, very easily. However music listening has increased globally due to the internet. ...read more.

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This essay starts off well but I do not think the writer has a full grasp of this (quite difficult) concept of perfect competition. The second part of the essay drifts away from the question too much and does not come to a conclusion on the extent to which IT has increased competition.

Marked by teacher Dennis Salter 04/04/2013

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