Why perfect competition is the best market structure essay

Diagram for perfect competition The industry price is determined by the interaction of Supply and Demand, leading to a price of Pe. Limited to zero profit margins means that companies will have less cash to invest for expanding their production capabilities. A Prosperous Economy Needs Innovators The theory of perfect competition enables economists to ignore the conditions under which, through innovation, business enterprises grow large and often come to dominate their industries.

As soon as a firm in a perfect competition decreases its price, it enters the realm of imperfect competition. A large population of both buyers and sellers ensures that supply and demand remain constant in this market. In the long run, however, when the profitability of the product is well established, and because there are few barriers to entry[7] [8] [9] the number of firms that produce this product will increase until the available supply of the product eventually becomes relatively large, the price of the product shrinks down to the level of the average cost of producing the product.

Also, the marginal revenue curve has a discontinuity at the link. What determines whether a company invests for the future or lives off the past. They are not criticizing the price taker assumption because it makes economic agents too "passive", but because it then raises the question of who sets the prices.

The importance of non-price competition In competitive markets, non-price competition can be crucial in winning sales and protecting or enhancing market share.

Here are the four basic market structures: The arrival of new firms or expansion of existing firms if returns to scale are constant in the market causes the horizontal demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve.

For example, in agriculture, the owner of a small organic products shop can talk extensively about the grain fed to the cows that made the manure that fertilized the non-GMO soybeans — that's differentiation. Most non-neoclassical economists deny that a full flexibility of wages would ensure the full employment of labour and find a stickiness of wages an indispensable component of a market economy, without which the economy would lack the regularity and persistence indispensable to its smooth working.

The increase in total revenue from producing 1 extra unit will equal to the price. This occurs at output QS, and the firm will then chooses the price level PS. A cost-reducing innovation from one producer will, under the assumption of perfect information, be immediately and without cost transferred to all of the other suppliers.

Ideal market structure Essay Sample

Some economists have a different kind of criticism concerning perfect competition model. However, some industries are close. Zero transaction costs — Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.

Both the consumers and producers have a perfect knowledge of market conditions.

Perfect Competition

Nature of the Commodity: Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and the innovative firm a stronger balance sheet, even as consumers get higher quality, lower cost products.

However perfect competition is as important economic model to compare other models. The final outcome is that, in the long run, the firm will make only normal profit zero economic profit. The price is determined based on where the quantity falls on the demand curve, or the red line.

While reality is far from this theoretical model, the model is still helpful because of its ability to explain many real-life behaviors. Technologies, such as PHP and Java, were largely open-source and available to anyone.

This is known as dynamic efficiency. Furthermore, new firms in the market must have no competitive disadvantage compared with the existing firms. Thus, Q is the profit maximising level of output under a wide range of cost conditions from MC1 to MC2.

The first group believes the assumptions built into the model are so unrealistic it cannot produce any meaningful insights. Particularly radical is the view of the Sraffian school on this issue: The flaw in considering the stock exchange as an example of Perfect Competition is the fact that large institutional investors e.

The rule is conventionally stated in terms of price average revenue and average variable costs. In contrast, in the theory of innovative enterprise, a firm can become dominant by transforming its cost structures, gaining competitive advantage over firms that do not.

In real-world markets, assumptions such as perfect information cannot be verified and are only approximated in organized double-auction markets where most agents wait and observe the behaviour of prices before deciding to exchange but in the long-period interpretation perfect information is not necessary, the analysis only aims at determining the average around which market prices gravitate, and for gravitation to operate one does not need perfect information.

The demand curve for the industry is not perfectly elastic, it only appears that way to the individual firms, since they must take the market price no matter what quantity they produce. Cheap and Efficient Transportation Cheap and efficient transportation is another characteristic of perfect competition.

It reduces output to drive up prices and increase profits.

Perfect Competition

With the start of another academic year, hundreds of thousands of college students who take introductory microeconomics courses will learn from their professors that the best possible allocation of society's resources occurs when " perfect competition " characterizes the organization of industry.

The concentration ratio in the industry tends to be relatively low as there are many firms operating in the market. Thus, even if one of the farms producing goods for the market goes out of business, it will not make a difference to average prices.

They are innovative enterprises, not "perfect" competitors. If they were to earn excess profits, other companies would enter the market and drive profits down.

Perfect competition

In perfect competition market, firms make sales with lower prices than monopoly market. Because of the monopoly market’s equilibrium price is higher level for long-term. In perfect competition market, firms make to more low-cost production but monopoly market’s production cost is.

Perfect Competition And Monopoly Market Structure. Print Reference this. Published: 23rd March, In this essay Perfect competition and Monopoly market structures are analysed to understand the nature of a business.

Perfect Competition: "A market Structure where there are many firms; where there is freedom of entry into the industry; where. Perfect competition sometimes is regarded as an ideal market structure because it supports the actual ideology of a free market economy where, for example there is no government intervention.

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. Perfect competition is a market structure where many firms offer a homogeneous product.

Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.

Features of perfect competition. Many firms. Freedom of entry and exit; this will require low sunk costs. Perfect competition is the ideal and the best form of market structure because it is the most efficient market structure. It achieves efficiency because of the efficient allocation of resources: the profit-maximizing quantity of output produced by a perfectly competitive firm results in the equality between price and marginal cost.

Why perfect competition is the best market structure essay
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Ideal market structure | Essay Example