Perfect Competition

Perfect Competition: Economics

In economic theory, perfect competition occurs when all companies sell identical products, which does not influence the price. Companies can enter or exit without a barrier, buyers have "perfect" or complete information, and companies cannot determine prices. In other words, it is a market that is entirely influenced by market forces. It is the opposite of imperfect competition, which is a more accurate reflection of a current market structure.

What is perfect competition?

Ideally, perfect competition is a hypothetical situation that cannot possibly exist in a market. However, perfect competition is used as a base to compare with other forms of market structure. No industry exhibits perfect competition in India. You should know about competitive advantage.

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

• All firms sell an identical product; the product is a "commodity" or "homogeneous."
• All firms are price takers; they cannot influence the market price of their products.
• Market share does not influence prices.
• Buyers have perfect information in the past, present, and future about the product being sold and the prices charged by each firm.
• Resources for such labor are perfectly mobile.
• Firms can enter or exit the market without cost.

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Perfect competition definition

Definition: Perfect competition describes a market structure where competition is at its greatest possible level. To make it clearer, a market that exhibits the following characteristics in its structure is said to show perfect competition:

1. Many buyers and sellers
2. Every firm produces a homogenous product.
3. Free entry and exit of firms.
4. Zero advertising cost
5. Consumers have perfect knowledge about the market and are aware of any changes in the market. Consumers indulge in rational decision making.
6. All the factors of production, viz. labour, capital, etc., have perfect mobility in the market and are not hindered by any market factors or market forces.
7. No government intervention
8. No transportation costs.
9. Each firm earns expected profits, and no firm can earn super-normal profits.
10. Every firm is a price taker. It takes the prize as decided by the forces of demand and supply. No firm can influence the price of the product.

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How to find several firms in perfect competition?

Firms are said to be in perfect competition when the following conditions occur: (1) the industry has many firms and many customers; (2) all firms produce identical products; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market. You can read about money market.

Firm Revenues

A firm in a competitive market wants to maximize profits just like any other firm. The profit is the difference between a firm's total revenue and its total cost. For a firm operating in a perfectly competitive market, the revenue is calculated as follows:

• Total Revenue = Price * Quantity
• AR (Average Revenue) = Total Revenue / Quantity
• MR (Marginal Revenue) = Change in Total Revenue / Change in Quantity

The average revenue (AR) is the amount of revenue a firm receives for each output unit. The marginal revenue (MR) is the change in total revenue from an additional unit of output sold. For all firms in a competitive market, both AR and MR will be equal to the price. Get assignment help.

Profit Maximization

To maximize profits in a perfectly competitive market, firms set marginal revenue equal to marginal cost (MR=MC). MR is the slope of the revenue curve, which is also like the demand curve (D) and price (P). In the short term, economic profits can be positive, zero, or negative. When the price is more significant than the average total cost, the firm is making a profit. When the price is less than the average total cost, the firm is losing the market.

This means that a perfectly competitive firm faces a horizontal demand curve at the market price, as shown in Figure below.

Figure: Perfect Competition in the Long Run: Economic profit cannot be sustained in the long run. The entry of additional firms into the market leads each firm's demand curve to shift downward, lowering the price, average revenue, and marginal revenue curves. The company will earn no economic profit in the long run. At its lowest point, its horizontal demand curve will intersect with its average total cost curve. You should get economics assignment help if you are preparing an assignment on economics.

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What are examples of perfect competition?

1. Agricultural markets. In some cases, several farmers are selling identical products to the market and many buyers. At the market, it is easy to compare prices. Therefore, agricultural markets often get close to perfect competition. Consider a farmers’ market where each vendor sells the same type of jam. There is little differentiation between each of their products, as they use the same recipe, and they each sell them at an equal price. At the same time, sellers are few and free to participate in the market without any barrier. Buyers, in this case, would be fully knowledgeable of the product's recipe and any other information relevant to the good.
2. Foreign exchange markets. Here currency is all homogeneous. Also, traders will have access to many different buyers and sellers. There will be good information about relative prices. When buying currency, it is easy to compare prices.
3. Internet-related industries. The internet has made many markets closer to perfect competition because it has made it quite easy to compare prices quickly and efficiently (perfect information). Also, the internet has made barriers to entry lower. For example, selling a widespread good on the internet through a service like e-bay is close to perfect competition. It is easy to compare the prices of books and buy from the cheapest. The internet has enabled many books to fall in price so that firms selling books on the internet are only making regular profits.

Before concluding, the emergence of new markets in the technology sector resembles perfect competition. During the early days of social media networks, for example, there was a proliferation of sites offering comparable services. Here comes the existence of perfect competition where different social media sites offer essentially the same good or service.