Competitive Markets for Goods and Services
Read this chapter for an explanation of the model of perfect competition, which is crucial to your understanding of the more complicated and realistic models that will be studied next. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of each section.
2. Perfect Competition: A Model
2.1. Case in Point: Entering and Exiting the Burkha Industry
Muhammed Ibrahim Islamadin was driving a cab in Kabul, Afghanistan, when the Taliban took over the country. He foresaw the repression that would follow and sensed an opportunity.
He sold his taxicab and set up a shop for sewing and selling burkhas, the garments required of all women under the Taliban's rule. Mr. Islamadin had an easy task selling, as women caught outdoors with exposed skin were routinely beaten by the Taliban's religious police. He told The Wall Street Journal, "This was very bad for them, but it was good for me".
Of course, Mr. Islamadin was not the only producer to get into the industry. Other Afghani merchants, as well as merchants from Pakistan and China, also jumped at the opportunity.
The entry of new firms exemplifies an important characteristic of perfect competition. Whenever there is an opportunity to earn economic profits - even an unexpected opportunity - new firms will enter, provided that entry is easy.
The model of perfect competition also assumes that exit will be easy if and when a firm experiences economic losses. When the Taliban rulers were ousted by the United States and its allies in 2001, Mr. Islamadin expected that the demand for burkhas would begin to fall. It did. The sales fell 50% almost immediately. Prices fell as well, generally by about 20%.
It was simple for Mr. Islamadin to leave the industry. He gave his remaining stock of burkhas to a brother who was producing them in the countryside where women continued to wear them. As for Mr. Islamadin, he has made plans to go into the glassware business. He expects the demand for glass teacups to be strong whatever happens in Afghanistan's critical future.
He sold his taxicab and set up a shop for sewing and selling burkhas, the garments required of all women under the Taliban's rule. Mr. Islamadin had an easy task selling, as women caught outdoors with exposed skin were routinely beaten by the Taliban's religious police. He told The Wall Street Journal, "This was very bad for them, but it was good for me".
Of course, Mr. Islamadin was not the only producer to get into the industry. Other Afghani merchants, as well as merchants from Pakistan and China, also jumped at the opportunity.
The entry of new firms exemplifies an important characteristic of perfect competition. Whenever there is an opportunity to earn economic profits - even an unexpected opportunity - new firms will enter, provided that entry is easy.
The model of perfect competition also assumes that exit will be easy if and when a firm experiences economic losses. When the Taliban rulers were ousted by the United States and its allies in 2001, Mr. Islamadin expected that the demand for burkhas would begin to fall. It did. The sales fell 50% almost immediately. Prices fell as well, generally by about 20%.
It was simple for Mr. Islamadin to leave the industry. He gave his remaining stock of burkhas to a brother who was producing them in the countryside where women continued to wear them. As for Mr. Islamadin, he has made plans to go into the glassware business. He expects the demand for glass teacups to be strong whatever happens in Afghanistan's critical future.