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1. (25 pts) Give an example of a perfectly competitive market (or one that closely approximates one) except those given in chapter 5. Explain why you believe this market is competitive. If you can’t think of such a market, explain why it is difficult to find a perfectly competitive market. Be specific.
The bottled water industry closely resembles a perfectly competitive market. First, there are plenty of people who drink bottled water and there are plenty of producers of bottled water. So, there are many buyers and sellers in the market. Second, anyone who has the money can start a bottled water business. All they need is a water filter facility and machines to put the water into bottles. So, there are no barriers to enter the market. Third, the source of water could be from any place. As long as the water is filtered according to the FDA’s guidelines and regulations, then it is good for consumption. The resulting filtered water from all producers is very much the same. So, the products being sold by these producers are all homogeneous. Fourth, since the FDA has stringent guidelines and regulations for the bottled water industry to follow, both the rules and minimum cost of producing bottled water are perfectly and readily available to consumers and producers. So, both the buyers and producers have perfect information about the price and characteristics of the product. It does not matter from which producer you buy, the price of the same size of bottled water is about the same. Fifth, these bottled waters are mostly sold at convenience stores and supermarkets. Therefore, the majority of the time there is no transaction cost for the consumers. All these characteristics describe an almost perfectly competitive market. The only minor differences are the different ways the water is filtered and the different sources of water used. If one tastes the bottled water from Avian and the bottled water from Poland Spring, one will not be able to tell the difference. Only when the water is examined under a microscope then one could see the difference. Not many consumers will go to that extent before buying a bottle of water.
Bottled Water Regulation and the FDA (August 1, 2002). Food Safety Magazine. Retrieve from
2. (25 pts) Give an example of a market that is not currently perfectly competitive but could become one, or at least more competitive, under certain possible circumstances. What are those circumstances and how will they make a market (more) competitive?
A good example of a market that is not currently perfectly competitive but could become one under certain circumstances is the New York City Chinese takeout restaurant business. All Chinese takeout restaurants in New York City have almost the same exact dishes on their menus. I believe this market is almost perfectly competitive for the following reasons. First, there are plenty of people who order lunches and dinners from Chinese takeout restaurants, and there are plenty of Chinese takeout restaurants in any NYC neighborhood. So, there are plenty of buyers and sellers in the market. Second, anyone who could afford the store rent and the chefs’ salaries could get into the business. So, there is no barrier to enter the market. Third, the majority of the takeout dishes on the menu are exactly the same at each restaurant. So, the dishes sold in these restaurants are almost homogenous. Fourth, there are printing companies that print almost the same exact takeout menus for all Chinese takeout restaurants in NYC. So, information about the business is perfectly and readily available to all who want to start a Chinese takeout restaurant business. Fifth, usually, these restaurants are situated in crowded neighborhoods where people can just take a walk to the restaurants to make their orders and pick up their orders. But because of the covid-19 pandemic, the in-person traffic to these restaurants has been drastically decreased. Therefore, nowadays most of the revenue generated by these restaurants is from online orders and deliveries. Therefore, depending on location, some of these restaurants have to raise the price of their dishes. It is because for certain locations where the tolls and gas used for delivering the orders could eat into the revenue. Therefore, the covid-19 pandemic has caused a big difference in the prices of these same dishes between the restaurants. But I think as soon as the pandemic is over, these restaurants will become perfectly competitive again.
3. (20 pts) If (perfectly) competitive firms are price takers, how can such a firm make any economic profit in the short run? Can such a firm continue to make economic profit in the long run/ Why/how/why not? Explain.
For a perfectly competitive firm to make an economic profit in the short run, it has to be able to keep its average total cost below its marginal revenue. Meaning, it has to generate a large enough marginal revenue to set off the average total cost and any extra left will be the economic profit. It is because the only two variable factors that control profit in the short run are the average total cost and the number of products sold. The firm could maximize its economic profit by producing and selling the number of products where its marginal revenue is equal to its marginal cost. The decision to whether stay in the market for the long run solely depends on the firm’s performance in the short run. If throughout the short run, the firm was able to make an economic profit, then it is rational to stay in the market for the long run. However, if the firm could only make economic losses throughout the short run, then it would not be rational to stay in the market for the long run. It is because, in the long run, the economic losses will eat into the revenue. In that case, the firm should first exist the market and come back in with a lower average total cost. Since in the long run, all inputs are variable, the firm could either lower its labor cost or capital cost which in turn will lower its average total cost.
Blair, R. D., & Rush, M. (2019). The Economics of Managerial Decisions. New York, NY: Pearson.
Respond to this discussion.