We chose the rice sector as an example of a nearly competitive sector. Below we will describe in detail why the rice sector comes close to a perfectly competitive sector. The following conditions are needed for a perfectly competitive market; homogeneous products, many buyers and sellers, free entry and exit of firms and all information should be available to make a rational decision.
First, we will look at the behavior or rice firms depending on their time horizon. We assume in a perfectly competitive market that there are many sellers and buyers, that there is one universal price and that products are homogeneous. We can see for rice that there are indeed many sellers and buyers around the world, that they sell homogeneous products and that…show more content… The decision is based on the supplier’s average total costs, when the costs are higher than the price than a firm would exit the market, because it makes a loss. When the price is higher than average total costs it means that a supplier can make a profit by entering the market. Both exit and enter decision will drive the market back to its equilibrium price and quantity. The economic profit of supplier in a perfect competitive market is zero in the long run. Moreover, in the long run all fixed costs become variable so we could call it total average costs or total variable costs, in the long run both costs are the same. In the long run firms can decide to buy land and enter the market or to buy an extra piece of land to expand their…show more content… All the firms together will eventually drive the market down to its equilibrium and zero economic profit. Therefore, it is not possible for a firm to set its own price, because new firms will enter if they can produce at a lower price and drives the firm out of business. Two main reason are that the all firms in the market produce homogeneous products, in this case rice. A rational customer would not pay 2$ for a kilo of rice when it also could have paid 1$ for a kilo. Another reason is when a firm sets a higher price and has economic profit it would create an opportunity for other firms to enter the market and to increase the supply which would drive down the market price. The World Bank reports every month the price of rice and next you can look up the current price of rice at the