Perfect competition is a sort of market where many sellers and buyers are present to initiate selling and buying mechanisms. In a perfectly competitive market, no restrictions are there. No direct competition exists as sellers are predicted to sell homogenous or identical products. Welcome to this post that outlines a detailed analysis of the perfect competition market.
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What Is Perfect Competition?
What perfect competition in economics means? A perfect market is an atomistic market. It is defined by different idealizing conditions, which collectively are called perfect competition. In economics, it signifies a particular market, which is easy for market players to exit and enter.
Importance Perfect Competition for Businesses and Consumers
Under a perfect competitive, prices reflect demand and supply. Companies can earn enough profit. Even startup costs, advertising, or marketing costs are low. So, entering the market for production or sales becomes easier for businesses. It is advantageous for consumers as it keeps prices low with high quality, choice, and services.
Outlining How Perfect Competition Works
No monopolies are present in a perfect competition model. Here, only one single firm supplies the service or goods, and the firm charges the price it wishes as consumers don't have any other alternative. It also becomes difficult for budding competitors to enter this marketplace. The following points denote the process of how perfect competition works.
- Firms sell an identical product
- Firms are the price takers
- No market share influences the price
- Buyers have complete information about the product's selling details and charges
- Labor and capital resources are mobile
- Firms can exit or enter the market without expenses
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Characteristics of a Perfectly Competition
Besides lower obligations and restrictions from the government and efficient transportation, a perfectly competitive market comprises the following characteristics. So, let's learn the features of perfect competition.
A Large Number of Sellers and Buyers
In this type of market, a large population of sellers and buyers are present. Sellers here are small, medium, and unorganized enterprises. Sellers and buyers maintain the demand and supply chain's constancy in the market.
Homogeneous or Identical Products
The best part of perfect competition is that firms sell homogeneous products with similar pricing and features. So, buyers fail to differentiate between products available based on their features. They don't get any preference to choose a certain seller or product over the other.
Perfect Information and Transparency
Sellers have market acumen considering technological requirements, supply levels, and expenses. Buyers are well-informed about the service or product's prices, quality, and features. So, there's no chance of manipulation.
Freedom to Entry and Exit the Market Anytime
Production and startup costs in this type of competition are low. The product demand is also high. So, entering the market is easy, while exiting is easier. So, it means when a firm plans to exit, there are other players who take their position and fulfill the supply needs.
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Demand and Supply in a Perfect Competition Market
In a perfectly competitive market, no one can affect prices. Both the buyers and sellers know the market price. And there's no excess demand or supply in the market-clearing price.
Market Demand and Individual Firm Demand
The market demand curve is downward sloping. On the other hand, the individual firm comprises a perfectly elastic demand curve.
Market Supply and Individual Firm Supply
In a perfectly competitive market, firms are at the most competitive stage since they all sell identical products with almost limitless demand. So, a firm can supply what it produces at the market price. That means the supply curve for the individual firm remains the same as the marginal cost curve.
Equilibrium Price and Quantity in A Perfectly Competitive Market
In this type of market, equilibrium occurs at a given price and quantity. Here, the marginal cost of attracting a unit from the supplier is the same as the highest price attracting the purchase of a unit from the buyer.
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Comparison with Monopoly, Oligopoly, And Monopolistic Competition
Here's a tabulated list of comparisons between monopoly, monopolistic, and oligopoly competition:
| Monopolistic Competition
|The monopolistic competition comprises multiple sellers. But they do not deal in identical products. They sell differentiated ones, so the prices are different, and so do the quality, convenience, style, brand name, and location.
||Oligopoly consists of a few sellers, where each seller supplies an excessively large portion of products sold in a marketplace. Owing to the fact that the cost of starting a business in the oligopolistic industry is high, there's a lower number of firms entering this business universe.
||Considering the degree of competition and number of sellers, monopolies are just the opposite of perfect competition. In this type of competition, there's just one seller. The market might be in a geographical area, like a regional area or city, and doesn't have to be the whole entire country.
Uncovering 5 Advantages and 4 Disadvantages of a Perfect Competition
Get an insight into the five top advantages of perfect competition:
- These markets are ideal market structures
- Their focus is on consumers
- Sellers do not have any pricing power
- The features, rate, and quality of the product remain similar to perfectly competitive products.
- Startup costs, advertising, marketing costs, and production are very low, so anyone can enter the market
Here's presenting the top 4 disadvantages of a perfectly competitive market:
- It's a theoretical or hypothetical concept with negligible real-world existence
- Sellers can't add value to products since adding features or value doesn't increase the price
- The market comprises heavy competition, which is another disadvantage for sellers because of high freedom and low barriers to exit and entry
- Existing sellers are well-established, so they have an advantage over the new players
Role of Profit Maximization in Perfect Competition
Profit maximization in perfect competition is the process firms undergo to ensure maximum output and price levels for the best returns. The choice for profit-maximizing in a perfectly competitive firm occurs at an output level where the marginal revenue remains equal to the marginal cost.
Efficiency and Consumer Welfare in Perfect Competition
Profit-maximizing firms demonstrate both allocative and productive efficiency. So, in the foreseeable future, the price remains equal to the minimum cost curve due to the process of exit and entry.
In a perfect competition, equilibrium is at point 'K,' with welfare at the maximum. Note that welfare is the sum of this market's consumer as well as producer surplus.
Real-World Examples of Perfectly Competitive
Want to know more about perfect competition examples? The following are real-world examples (or the nearest approximations) of a perfectly competitive:
- Agricultural markets producing similar crops like mango, wheat, rice, and more
- Street food vendors like burger stalls and more
Challenges and Limitations of Perfect Competition
The limitations and challenges of a perfectly competitive include the following:
- A perfectly competitive market is hypothetical or theoretical with negligible real-world existence
- In this type of market, sellers won't be able to add value (even if they do by adding features, they cannot increase the price, so their effort is pointless)
- There's heavy competition in this market
- The existing sellers are reputed in this industry (so new players fail difficulties to take a stand until and unless the previous and well-established purposely exit the market)
In this guide, you have learned all about perfect competition. It is noteworthy to state that a perfectly competitive market is a hypothetical scenario. But there are a few businesses that apparently exist in perfect competition. The nearly best examples are street food vendors of a single category like pizza or burger and farmers selling the same crops like mangoes. Now that you have learned everything about the perfect competition market – let's discover the FAQs from below.
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