[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

COMPETITIVE MARKETS
To complete the model, economists make assumptions about the places where selfinterested
consumers and profit-maximizing firms meet: markets. Economists begin
by focusing on the case of many buyers and sellers, all buying and selling the same
thing. Picture a crowded farmers’ market with everyone buying and selling just one
good. Let’s say we are in Florida, and the booths are full of oranges.
Each of the farmers would like to raise her prices. That way, if she can still sell
her oranges, her profits go up. Yet with a large number of sellers, each is forced to
charge close to the same price, since any farmer who charged much more would
lose business to the farmer next door. Profit-maximizing firms are in the same position.
In an extreme case, if a firm charged any more than the going price, it would lose
all its sales. Economists label this case perfect competition. In perfect competition,
each firm is a price taker, which simply means that it has no influence on the
market price. The firm takes the market price as given because it cannot raise its price
without losing all sales, and at the market price it can sell as much as it wishes. Even
a decision to sell ten times as much would have a negligible effect on the total quantity
marketed or on the price prevailing in the market. Markets for agricultural
goods would be, in the absence of government intervention, perfectly competitive.
There are so many wheat farmers, for instance, that each farmer believes he
can grow and sell as much wheat as he wishes without affecting the price of wheat.
e-Insight
MARKETS, EXCHANGE, AND E-COMMERCE
In traditional societies, markets are places where people get
together to exchange goods. They are active, bustling places,
full of life. In the modern economy, goods and services are
being exchanged as if there were a well-defined marketplace.
The Internet has created a new kind of marketplace where
people all over the world can exchange goods and services
without ever getting together.
In traditional economies, prices for similar goods in different
marketplaces could differ markedly. Traders would
buy goods in a marketplace where they were cheap and then
transport them to where the price was higher, making a
handsome profit in doing so. These merchants helped make
markets work better. Much of their high income could be
thought of as a return on their information—on knowing
where to buy cheap and sell dear. And by moving goods
from places where they were valued less to places where
they were valued more, the traders performed an important
social function.
The Internet has enabled all of this to be done far more
efficiently, at lower cost, with more complete information.
Markets all over the world can be joined instantaneously,
creating a global marketplace. Now any buyer (not just a
merchant) can find the place where the good is selling at the
lowest price, and any seller can find the place where the good
is selling at the highest price.
Some have worried that the role of the middleman, of merchants,
will disappear. But there is more to trade than just
information about price. Many goods differ in a variety of
dimensions, such as quality and durability. E-markets work
best for well-defined goods, for which these issues are not
relevant—goods such as wheat or steel, or products like this
textbook.
THE BASIC COMPETITIVE MODEL ∂ 27