Why are the firms in the perfectly competitve markets unable to control the prices of the goods that they produce?
Because under a perfectly competitive market, there are lots of other producers trying to sell the same thing. Take for example a wheat farmer, and say the market price is $10 per bushel. What if the farmer charged $10.10, how much would he sell? Answer is zero, nobody would pay 10.10 when they could buy all they want at $10.00. Well, what if he charged $9.90. He would sell out of course and then feel like a schlemiel, because he could have just as easily sold all of his wheat for $10.
Under the market price in a perfectly competitivie market, a person can immediately buy or sell at that price.
Explained well, thanks.
In perfectly competitive markets, firms are unable to control the prices of the goods they produce due to several key factors:
1. Large number of buyers and sellers: In a perfectly competitive market, there are a large number of buyers and sellers. Each firm represents a small portion of the market and faces intense competition from other firms. Because of this, no single firm can have enough market power to dictate prices.
2. Homogeneous products: In a perfectly competitive market, firms produce identical, or homogeneous, products. Since buyers perceive no difference between the goods offered by different firms, they will choose the one offering the lowest price. As a result, firms have limited control over prices as they need to price their products competitively to attract customers.
3. Perfect information: In this type of market, buyers and sellers have perfect and instantaneous information about prices and availability of goods. This prevents any single firm from charging higher prices as buyers can easily compare prices and switch to a different supplier offering a better deal. Consequently, firms have little flexibility in setting prices.
4. Ease of entry and exit: In perfectly competitive markets, barriers to entry and exit are low. New firms can easily enter the market if they see an opportunity for profit, while existing firms can exit if they face losses. As a result, the market remains highly competitive, with no single firm having the power to control prices.
To summarize, the absence of market power, large numbers of buyers and sellers, homogeneous products, perfect information, and ease of entry and exit collectively explain why firms in perfectly competitive markets are unable to control prices.