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There are several small companies in the foreign exchange trading sector which ensures that the market structure is pure competition. Each firm is typically smaller in size when compared to the total market size; no firm can exert leverage on price changes; hence, the market power of demand and supply is the aspect that decides the price. The competition would be unchanged if the company wishes to exit the market or double its output (Kolmar & Hoffman, 2017).
The goods in the foreign exchange business industry are homogeneous, which means that they are all alike. The buyers cannot differentiate one product from another because there are no brand names or any feature that may single out a product. This feature means that every product of one firm is a perfect substitute of the product that is produced by another firm. This situation assures that the prices remain the same, because if any firm increase the price, all the customers will move to the other firm.
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 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 produced by different firms. The production techniques are also the same in the market.
The firms in the foreign exchange market industry maximize their profit when MR=MC at Q1. There is an elastic demand in the pure 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., & Hoffman, M. (2017). Principles of microeconomics. Cham: Springer.
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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