To receive full credit for each question, your answers must be at minimum 15 sen

Question

To receive full credit for each question, your answers must be at minimum 15 sentences long, it must answer every part of the question, it must include economic concepts that were taught in class and where necessary provide real world examples and empirical data. You must also explain your conclusions.

Question — What is the Structure/Organization of Our Economy?

Perfect (Pure) Price Competition and No Economic Power Or Oligopoly and Economic Power

What is a perfect (pure) price competition model and what are its assumptions? Explain in detail how the price competition model is supposed to work, its process and the outcome (this includes many components relating to the quality of goods, the type of ‘playing field’ that production and price competition takes place on, consumer sovereignty, etc.). Does this model hold logically and empirically? Explain.
From the heterodox perspective, how does an oligopolistic competitive market work in the real world? Include the assumptions behind this perspective. Does this model hold logically and empirically? Explain. Why does the prevalence and dominance of positive feedbacks support an oligopoly structure over a perfect (pure) price competitive structure (include readings)? Why is it that oligopolistic firms do not compete over price and find it advantageous to collude and fix prices (a recent case involved Procter & Gamble and Unilever, 2011)? Note here that fixing prices is the exact opposite of a perfect price competition model.

What is the ‘logic’ of the production system (i.e., M-C-M’ or C-M-C’) from the orthodox and heterodox perspectives and what does this have to do with the structure/organization of our economy? Explain the difference between these two logics. Given the logic of each, what drives the economy forward (i.e. gets it moving) from these perspectives, supply or demand? Explain the process of both.

When you pose the answer please pose the question together, and put the answer right after that question, Thank you very much!

Explanation / Answer

Q. What is a perfect (pure) competition model and what are its assumptions?

Answer – Perfect Competition Model

Perfect competition or pure competition model is a market structure model consists of very large number of buyers and sellers dealing in a homogeneous product at a price decided by the market itself.

In other words, perfect competition model is characterized by the existence of large number of buyers and sellers with each seller selling homogeneous product with price of product being determined by industry as a whole and not by particular firm.

Assumptions of Perfect (pure) competition model –

1. Very large number of buyers and sellers – This model assumes the presence of very large number of buyers and sellers in the market. The rationale behind such assumption is that due to presence of very large number of buyers and sellers, each individual buyer and seller constitute an insignificant part of whole market and thus would not be able to influence the market.

2. Homogeneous product – This model assumes that each seller within market sells similar product in each respect. In other words, product sold in the market is homogeneous. As product of two sellers cannot be differentiated, buyer has no specific preference to buy from a particular seller and is willing to pay same price to each seller. This also implies that no particular firm can charge a higher price for its product and this result in uniform price being prevailed in the market.

3. Freedom of entry and exit - This model assumes that there are no barriers to entry or exit from the market. In other words, any firm can freely enter the market any existing firm can freely exit the market. This freedom of entry and exit results in firm earning only normal profit in the long-run.

4. Absence of selling cost – Selling cost implies expenditure on advertisement or promotion of product. Since, product sold by each seller is identical in this model, no seller have any incentive to incur expenditure with respect to advertisement or promotion. Therefore, there is no selling cost in this model.

5. Perfect mobility of factors of production – This model assumes that factors of production are perfectly mobile and are free to move to any industry with no geographical and occupational restrictions.

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