Perfect Competition

Perfect competition is a theoretical market structure.  It is primarily used as a benchmark against which other market structures are compared.  To be classifed as a perfect market the following five criteria would need to be me:
  1. All firms sell an identical product
  2. All firms are price takers
  3. All firms have relatively small market share
  4. Buyers know the nature of the product being sold and the prices charged by each firm.
  5. The industry is characterized by freedom of entry and exit.

Starbuck as an example ended up closing 600 stores because their overhead costs were far more than their economic profit.  Maybe cutting back a little on extra costs such as training (30 hours), benefits (even if you work only 20 hours per week) Top quality machines and free wi-fi Starbuck would be able to keep those stores open.  They are closing additional stores because stores are no longer within their break-even point or profit maximizing output levels.  As they close those 600 stores they are decreasing the quantity of coffee available within the industry so existing stores that remain open will now increase in output (sales).

In order to be able to accomodate long run costs the company needs to be very profitable in the short run.  The tough economy as of July 2, 2008 would have had an effect on the brand causing it to struggle.  Therefore, long run costs associated with operating several stores means closing 600 stores in order to stay in business.

The price of coffee is too expensive at Starbuck in comparison to other venues but their reputation for top quality coffee as a "brand name" brings its customers back again and again.  If they lowered their prices they would cause a diseconomies of scale because their extra costs (training, benefits, wi-fi, and equipment) would outweigh their revenue.