Chapter 8, Script 1



Economics "Ask the Instructor" Clip 10 Transcript

There are likely to be many used car sellers where you live. Does this mean that the market for used cars is perfectly competitive?

Well, as you know from your reading, there are several criteria that must be met before a market can be called “perfectly competitive”. Many buyers and sellers is just one. Admittedly, there are many sellers and buyers of used cars where you live, but even if you live in a relative small town chances are that there are a large number of “used car lots”. And in addition, on any given day there are many individuals with used cars for sale. And of course there are many potential buyers. But a perfectly competitive market must meet other criteria, too.

In addition, the good traded must be homogeneous. This means that each unit must be identical to all others. A good example of homogeneity is number 1 winter wheat. All bushels of this type and grade of wheat are the same and no buyer prefers one bushel over another. As you well know, used cars are not all the same. Ford Taurus is not the same as a Chevy Lumina and Honda Accords are not the same as Toyota Camrys. And a particular Honda Accord may be quite different from another Accord in terms of mileage and overall condition. Clearly, the homogeneity condition does not apply to the used car market.

And there are others reasons why the used car market is not a good example of a perfectly competitive market. In a competitive market, information is symmetrically distributed. Buyers and sellers have equally good information about the good and it’s characteristics. However, in the used car market information is likely to be asymmetric. Sellers probably know much more about the condition of used cars than buyers.

The used car market does, however, have at least one attribute of a perfectly competitive market--easy entry and exit. This alone will tend to keep profits in the industry relatively low and close to the cost of providing used cars. And that means that the used car dealers will earn what economists call a “normal profit”.

So, should you plan to make your career in the used car market, don’t count on earning economic profits, which, as you well know, are above normal profits. Even though this industry would not be classified as “perfectly competitive” entry and exit are relatively easy and therefore any tendency for profits to be unusually large will attract firms in the longrun, shifting the supply to the right and resulting in lower prices and reduced profits.

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