What is Perfect Competition?
A perfect competitive market consists
of infinite sellers and buyers. These sellers will be supplying homogeneous
products to the customers. Because the exist of many sellers in the market, the
prices of the products or goods would be practically static and no seller can
try to mark-up their price as they wish. So sellers only can follow the market
rules that had been set. The competition existing between sellers in the
perfectly competitive market is totally impersonal and hence, it is the ideal
one. The supply of homogeneous product guarantees that the products are always available
for the consumers whenever they wish to buy them and there is no hoarding and
illegal practices. Many economists believe the best market structure is perfect
competition because it can protect the interests of the common consumers.
Profit maximization is the main objective of the sellers in a perfectly
competitive market. Because of the existence of many sellers, the market share
of each seller automatically decreases in a perfectly competitive market.
Therefore they can enter and exit from the market whenever they wish.
What are the key characteristics of
Perfect Competition?
1.
Firms
produce homogeneous, identical products that are not branded.
2.
Each
unit of input, such as units of labour are also homogeneous.
3.
There
are no barriers to enter or exit the market.
4.
There
is perfect knowledge, with no information failure or time lags. Knowledge is
freely available to all participants, which means that risk-taking is minimal
and the role of the entrepreneur is limited.
5.
No
single firm can influence the market conditions or market prices. The single
firm is said to be a price taker, means that seller only can accept the price
that have been set by the market.
6.
Firms
can only make normal profits in the long run, but they can make abnormal
profits in the short run.
7.
There
are a very huge numbers of firms in the market.
8.
There
is no need for government regulation, except to make markets more competitive.
Does Perfect Competition exist in
reality?
In the short-run
Firms can
make a super-normal profit or losses.
(Source: Google)
In the long-run
Firms are attracted into the
industry if the incumbent firms are making supernormal profits. This is because
there are no barriers to entry and because there is perfect knowledge. The effect of this entry into
the industry is to shift the industry supply curve to the right, which drives
down price until the point where all super-normal profits are exhausted. If firms are making
losses, they will leave the market as there are no exit barriers, and this will
shift the industry supply to the left, which raises price and enables those
left in the market to derive normal profits.
(Source:
Google)
The
super-normal profit derived by the firms in the short run acts as a reason for
new firms to enter the market, which increases industry supply and market price
falls for all firms until only normal profits is made.
The benefits
1.
Because
there is perfect knowledge, there is no information failure and knowledge is
shared evenly between all participants.
2.
There
are no barriers to entry, so existing firms cannot derive any monopoly power.
3.
Only
normal profits made, so producers just cover their opportunity cost.
4.
There
is maximum allocate and productive efficiency:
-Equilibrium will occur where P= MC,
hence allocate efficiency.
-In the long run equilibrium will occur at output where MC= ATC, which is productive efficiency.
In my own opinion, I don’t really agree the existing of
perfect competition because it’s unrealistic as it got many difficult
conditions to fulfil. Such as no barriers to entry are very rare as even
start-up cost can act as a significant barrier. Other than that, firms only
will enjoy normal profit (Economic profit = 0) in the long run. Means that
firms didn’t even earn a cent after giving out so much hard work and effort.
Website
referred:
Post by:
Lionel Lee
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