One of the assumptions of Imperfect Competition is that the goods produced are close substitutes - Leaving Cert Economics - Question 5 - 2008
Question 5
One of the assumptions of Imperfect Competition is that the goods produced are close substitutes. Explain the underlined term and state two other assumptions.
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Worked Solution & Example Answer:One of the assumptions of Imperfect Competition is that the goods produced are close substitutes - Leaving Cert Economics - Question 5 - 2008
Step 1
Explain the underlined term
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Answer
The term 'close substitutes' refers to goods that are similar in nature and can fulfill the same needs for consumers. When goods are close substitutes, the differentiation between them is minimal, meaning that if the price of one good increases, consumers are likely to switch to the other good. This characteristic is essential in imperfect competition, as firms must compete not only on price but also on branding and advertising to maintain market share.
Step 2
Assumption 1
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Answer
There are many buyers in the industry. This allows for a competitive market where no single buyer can dictate the terms of purchase.
Step 3
Assumption 2
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Answer
There are many sellers within the industry. This ensures that companies must compete against each other, leading to varied pricing strategies and market dynamics.
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