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 Freedom of entry and exit; this will require low sunk costs. All firms produce an identical or homogeneous product.
Perfect competition, as one of them, is often described as the ideal market structure, and only treated as a theoretical ideal. If we compare the perfect competition market with other types of market structure, such as monopoly, monopolistic competition, and oligopoly, it will be obvious that the perfect competition is ideal mainly due to the presence of productive and allocative efficiency.
In perfect competition, there are a large number of small firms producing homogenous products, in other words, products produced by one firm is identical to the products produced by other firms in the market. There are also a large number of buyers within the market where they have perfect information about the products.
Therefore, no individual trader is able to influence the market price. The market price is thus determined by the operation of the market.
The firm faces a perfectly elastic demand curve for its product, as shown in Figure 1. In this figure P1 is the price set in the market, and the firm cannot sell at any other price.
If the firm tried to set above P1 it will sell nothing, as buyers know that there is no quality difference between the product as produced by other firms in the markets. Also, there is no incentive for any firm to set a price below P1. As the firm choose to produce at the profit maximum point, the firm needs to set output at a level where marginal revenue is equal to marginal cost.
Figure 2 illustrates this by adding the short-run cost curves to the demand curves. Consider the industry as a whole; the demand curve is conventionally downward sloping, as shown in Figure 3. On the supply side, the supply curve is the sum of each firm operating in the market, the result is the industry supply curve S1, as shown in Figure 2.
The price will then adjust to P1 at the intersection of demand and supply. The firms in the industry will supply Q1 output.
The firm is thus making super-normal profits at this price and the amount of total profits being made is shown as the shaded area adP1b on Figure 2. In short-run, the firm may also earn sub-normal profits, which is shown in Figure 4. The firm is thus making sub-normal profits at the price P2 and the amount of total sub-normal profits being made is shown as the shaded area abP2d.
In long run, all factors of the firm can be varied, therefore new firms can enter and existing firms can leave the industry. New firms will then continue to enter until any super-normal profit is competed away, that is only normal profit is earned.
Hence, the price will be risen, and earning normal profit. In summary, the long-run profit maximising equilibrium will only occur when there are no firms entering or leaving the industry. This will occur when normal profits are earned, i.
Productive efficiency is achieved when the firm is producing at the minimum point of average cost. As a result, under perfect competition, productive efficiency is achieved in the long run, but not in the short-run, when a firm need not be operating at minimum average cost. Productive efficiency is achieved in both the short run and the long run under perfect competition.If we compare the perfect competition market with other types of market structure, such as monopoly, monopolistic competition, and oligopoly, it will be obvious that the perfect competition is ideal mainly due to the presence of productive and allocative efficiency.
Thus, in this essay we would first go through a brief description of perfect competition and monopoly and how the resources are organised in these two different market structures to .
Monopoly is the other market structure, which is most different from perfect competition. Compared to a perfectly competitive market monopoly is less efficient.
Monopolistic firms’ profit maximizing production levels occur when their marginal revenues equals their marginal costs. 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.
Why perfect competition is the best market structure Essay Why perfect competition?? Executive Summary This report provides information related to the four main market structures and why perfect competition is the most efficient. The market structure was chosen because there are many barriers to enter the market.
In the event the airline industry chose to use the perfect competition structure anyone could enter and exit as they pleased because there are no barriers in this structure.