CAS EC 101 Lecture Notes - Lecture 4: Perfect Competition, Barter, Opportunity Cost
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Prices are defined when money is used for selling and buying. The price of a good is the amount of money exchanged for one unit of the good. Prices are useful, because they allow people to compare the opportunity costs of different goods. Prices are not clearly defined in a barter system. Barter does define an exchange ratio for each pair of goods. Example: i"ll give you 12 tons of bananas in exchange for your stradivarius violin. But those exchange ratios are not useful for measuring opportunity cost. The phrase perfect competition describes a special type of market, one with many buyers and many sellers (and other properties) A perfectly competitive market represents an extreme case that doesn"t exist in the real world. Perfect competition is a model -- a part of the more general free-market model. The perfect competition model is a good description of some real markets. Can predict what things will be like in the future.