Perfect Competition - Explained
What is Perfect Competition?
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What is Perfect Competition?
Perfect competition is a type of market structure where many companies or firms are selling the same product.
Is there a Such Thing as Perfect Competition?
In the real world, there is no such thing like perfect competition. Firms with huge competition existing in liquid markets for homogenous products like wheat, can be considered as the nearest practical examples.
What are Price Takers?
Because firms selling in a market with perfect competition have no control over their product prices, they tend to be price takers. That is, they cannot sell at a price higher than the market price.
How Perfect Competition Affects Consumer Information
In this market, consumers have full or perfect knowledge about the product that is on sale. They know what firm charges what price for a specific product.
Perfect Competition Affects Labor
There is a perfect mobility in terms of resources including labor, and there are no barriers to entry and exit involved for such firms.
How Does Perfect Competition Related to Monopoly?
Perfect competition and monopoly are completely in contrast to each other.
What is a Perfect Market?
A market that is perfectly competitive has the following features:
- All companies sell homogenous products.
- All companies are price takers and not price makers.
- All companies enjoy lesser market share.
- Buyers already have knowledge about the type of product being sold followed by its prices.
- The firms can enter or exit the industry any time they want.
What are Imperfect Markets?
Most markets are imperfect. An imperfect market results from situations where there are few sellers, low consumer information, and non-homogenous products.
Where did the theories of Perfect Competition and Imperfect Competition Come from?
The Cambridge tradition of post-classical economic thought gave origin to the modern theory of perfect vs imperfect competition.
How is the principle of Perfect Competition Used?
The theory of perfect competition is used in theoretical economic models to demonstrate principles of supply and demand.
What is a large and homogenous market?
A market with perfect competition has lots of buyers and sellers involved. The products sold by these small firms are almost same in terms of attributes, prices, and functions. This makes it difficult for buyers to differentiate products based on tangible and intangible attributes. Here, customers can easily make a switch between products produced by different companies.
Lack of Control in a Perfect Market
Government authorities have a huge role to play in formulating and controlling markets, and managing the demand and supply. They have the authority to put barriers on the entry and exit of companies by enforcing rules and regulations. For instance, a firm that is in pharmaceutical sector needs to go through a lot of rules related to research, manufacturing, and sale of medicines.
Such firms need to invest a lot of capital in terms of employees, infrastructure, etc. Such huge costs when added up make it hard for firms to launch a new pharma product in the market. However, the tech industry has comparatively lesser rules to follow in comparison to the pharma industry. Hence, entrepreneurs who plan to start something in the tech industry can do so by making minute investments, thereby making it easier to enter the market, and growth in the coming years.
Drawbacks of Perfect competition models?
In a market with perfect competition, it is difficult for companies to be unique and offer products and services at a higher price to customers.
Firms in markets with perfect competition face the lack of economies of scale.
Do firms make profits in a perfectly competitive market?
Firms operating in a perfectly competitive market generally do not make any profits. There may be some stages when firms make some profits. But the market conditions tend to nullify the impacts of positive or negative profits, and set them in an equilibrium position.
Marginal Revenue Equals the Price of a Product in a Perfect Market
In perfect competition, the average revenue and marginal revenue for companies is equivalent to the price of the product. This creates a situation of market equilibrium that was not present before. With the adjustment of demand and supply, the profits and losses of firms turn out to be zero in the long run.
Barriers to Entry Prohibit Perfect Competition
Barriers to Entry in a market do not allow for perfect competition to take place in today's world.
There can be several barriers to entry that discourage a new firm to enter the perfectly competitive market. Some of them include more startup costs, stringent government rules and policies.
- Market Structure
- Perfect Competition
- Bidding War
- Substitution Effect
- Imperfect Competition
- Market Power
- Price Takers
- Price Makers
- Perfect Competition and Decision Making
- Captive Market
- Contestable Market Theory
- Highest Profit Point in a Perfectly Competitive Market
- Using Marginal Revenue and Marginal Costs to Maximize Profit
- Marginal Revenue Curve
- Profit Margin and Average Total Cost
- Break Even Point - Cost Curve
- Shutdown Point - Cost Curve
- Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
- Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
- Decisions to Enter or Exit a Market in the Long Run
- Long-Run Equilibrium in a Perfectly Competitive Market
- Constant, Increasing, and Decreasing Cost Industries
- Productive and Allocative Efficiency in Perfectly Competitive Markets
- Market Efficiency
- Market Inefficiency
- Pareto Efficiency
- Search Theory
- Natural Monopoly
- Legal Monopoly
- Bilateral Monopoly
- Promoting Innovation through Intellectual Property
- Predatory Pricing
- How Monopolists Set Price with the Demand Curve
- Total Cost and Total Revenue for a Monopolist
- Marginal Revenue and Marginal Cost for a Monopolist
- Inefficiency of Monopoly
- Perfectly Competitive Market
- Monopolistic Competition
- Differentiated Products
- Perceived Demand for a Monopolistic Competitor
- Monopolistic Competitors Choose Price and Quantity
- Monopolistic Competitors and Entry
- Monopolistic Competition and Efficiency
- Cartel (Economics)
- Game Theory
- Traveler's Dilemma
- Prisoner's Dilemma
- Iterated Prisoner's Dilemma
- Nash Equilibrium
- Diner's Dilemma
- Trembling Hand Perfect Equilibrium
- Gambler's Fallacy
- Arrows Impossibility Theorem
- Backward Induction
- Tournament Theory
- Oligopoly and the Prisoner’s Dilemma
- Forcing Cooperation in a Prisoner’s Dilemma
- Cooperation and the Kinked Demand Curve
- Corporate Merger or Acquisition
- Antitrust Laws
- Herfindahl-Hirschman Index
- Concentration Ratio
- Other Approaches to Measuring Monopoly Power in an Industry
- Restrictive Practices under Antitrust Law
- Natural Monopoly
- Cost-Plus Regulation
- Price Cap Regulation
- Regulatory Capture