Industrial organization or market structure refers to the characteristics of a m
ID: 1233980 • Letter: I
Question
Industrial organization or market structure refers to the characteristics of a market or industry, such as the type(s) of product, number and size of firms, ease of entry into industry, cost of exiting, independence of action etc. One such industry is known as Pure Competition. Describe the attributes of such an industry and provide some examples.Discussion Title: Pure/Perfect Competition
Explore why, in the long run, typical firms in perfectly competitive industries earn zero economic profit (or earn only a normal return on investment). What is the adjustment process that drives economic profits to zero? Why does this process not occur in less competitive industries? Find an example that illustrates the process.
Explanation / Answer
A market characterized by a large number of independent sellers of standardized products, free flow of information, and free entry and exit. Each seller is a "price taker" rather than a "price maker". Because of this, In the long-run economic profits are always zero since there is free entry/exit in a perfectly competitive market. Firms will either enter the industry until there are no possible profit opportunities. If there are economic losses, firms will leave the industry until profits hit zero. The biggest factor driving this is the free entry/exit of firms in the long run, and that firms are selling identical products. With firms being able to enter and exit the market as they wish, profit opportunities cannot last. If I observe another firm making positive profits, there is an incentive for me to enter the industry (at no cost) and try to take advantage of some of these profits. Since there are many identical firms, there will be many firms entering the industry to take advantage of these profit opportunities. However, when many firms compete, the market price decreases and the profit opportunities disappear. This process does not typically occur in less competitive industries because the components that make up "Perfect Competition" do not exist. The simple fact is that, in a less competitive market, you do not have enough sellers or buyers which cause prices, costs, and demand to reach the level where zero economic profit is earned.