Question

Consider three industries: organic onion farming, aluminum production and car production.

a.) Drawing on the characteristics of a competitive market outlined in the chapter, explain which of the industries named is most likely to be perfectly competitive. Be sure to explain why those industries you believe are less competitive fail to meet the criteria outlined in the chapter.

b.) The vast majority of industries are probably not perfectly competitive. Why, then, do you suppose economics courses emphasize the study of perfect competition as much as they do?

Answer 1

a. Organic onion farming is most likely to be perfectly competitive, because there are a large number of firms sell-ing an identical product in an industry without barriers to entry. Aluminum production is an industry with a small number of dominant producers, and the need for access to key raw materials can be a barrier to entry. Because cars are differentiated between producers, the automobile industry does not qualify as one in which products are identical.

b. Perfect competition is the most straightforward industry structure, and it serves as a benchmark for comparison when measuring the efficiency of other markets. Also, many industries are close enough to perfect competition that the model of perfect competition makes accurate predictions of how these firms will behave.