Can anyone provide a real world example/industry where firms are in Perfect Competition with one another? Because in my read of the notes, if a firm lowers their price, no-one will buy from them. That seems strange
An example of a perfectly competitive good would be wheat. It has the traits one would find under perfect competition- low barriers to entry, indistinguishable from other competing offers (i.e. wheat is wheat), and many firms (or farmers). In this case, if one farmer increases the price of wheat, buyers will simply purchase the same wheat from another farmer, thereby putting the farmer who increased his/her price out of business. In this case, market players are price takers. In perfect competition, firms maximize profit when marginal revenue = marginal cost. If a firm lowers their price, MC > MR, resulting in losses.
Reread your notes. In perfect competition, the market sets the price, and the individual firms do not make a large enough portion of the industry to set their own prices. If a firm lowers its price, plenty of consumers would buy from them, but the firm would not be maximizing their profits because they would be able to sell the same quantity at market prices as they would below market. If they price their product above market, no one would buy from them. There are plenty of real world examples of perfect competition. Any commodity is a perfect competition industry. Do some research on pretty much any agriculture (corn, wheat, soybeans, etc.) or building materials (electrical supplies, concrete, lumber) as good examples.
BosyBillups, how about two vending machines selling same coke bottle kept side by side. If one of the machines has got higher price of coke (even by few cents) nobody will purchase the coke from it. Unless of course one is machine blind!
Thanks everyone! I was missing the real world context of coke machines and wheat, etc. That makes perfect sense now (no pun).