| Resumo: | A representative firm takes two kinds of decisions concerning space: its location and the set of prices it quotes in each point in space.2 Why is it important for an applied micro economist to examine these decisions? Let us begin by defining the terminology. By “fob price” we mean the price set by the firm in its location, while “delivered price” labels the full price that the consumer pays at its living place, including the transport cost of the product between the locations of supply and demand. Microeconomics has been traditionally dominated by the paradigms of “perfect market” and “perfect competition”. A “perfect market” is a structure supporting transactions such that each consumer and each producer know the prices bid by all consumers and the prices asked by all producers. “Perfect competition” means that, among other assumptions, the products supplied by the firms are completely homogeneous, so that each consumer is indifferent among them when they are supplied at the same price. Moreover, “perfect competition” means that the number of producers competing in each market is high. Together, these two assumptions (homogeneity and large number of producers) ensure that each firm is arbitrarily small in relation to the market, so that it cannot influence the price and that it faces an infinitely elastic demand curve. “Perfect market” and “perfect competition” jointly determine that each product has a unique price at the market where the product is traded. For both conditions to hold, the market should be close to a “point” in geographical terms. The word “market” originally meant this physical “meeting point” (for instance, the stock exchange, or the commodities exchanges).
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