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There are also small businesses in the foreign exchange trading sector. When compared to the total scale of the industry, each company is typically smaller in size. As a result, since the price is dictated by market forces of demand and supply, no firm can impose control on price adjustments. If the company wishes to leave the market or double its production, the market would be untouched (Kolmar, 2017)
Items that are identical
The goods in the foreign exchange trading industry are all the same. This implies that all of the ingredients are the same. The buyers cannot differentiate one product from another because there are no brand names or any feature that may distinguish one product from another. This feature means that every product produced by one firm is a perfect substitute of the product that is produced by another firm. The price also has to be same because any increase in price by one firm, will see all the customers moving to the other firm.
Perfect resource mobility
In this industry of foreign exchange, firms can enter or leave the market anytime. There are no barriers to entry or exit. There are no government restrictions in the foreign exchange market industry, unlike other industries. The firms in this industry can acquire labor, capital or any other resource they may require without restrictions.
In the foreign exchange market industry, all the buyers are completely aware of the market price and as such firms cannot sell goods at high prices. The buyers also have a perfect knowledge of the price of goods. The production techniques are also the same in the market.
Graphical illustration in the foreign exchange market industry
The firms in the foreign exchange market industry maximize their profit when MR=MC at Q1. There is an elastic demand in the perfect competition market structure which means that MR=MC=D (Bresnahan & Reiss, 1991)
In this firm MC=AC which means that the profit given by this firm is normal profits.
Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Bresnahan, T. F., & Reiss, P. C. (1991). Entry and competition in concentrated markets. Journal
of Political Economy, 99(5), 977-1009.
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