A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers, and society. Show
Key characteristicsPerfectly competitive markets exhibit the following characteristics:
The firm as price takerThe single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it. Equilibrium in perfect competitionIn the short runUnder perfect competition, firms can make super-normal profits or losses. PC short runOutput Costs &R evenueQPATCAR = MRMCAS DP QCopyright: www.ec onomicsonline.co.ukPriceThe INDUSTRY Price makerThe SINGLE FIRM Price takerShort run SNPHowever, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits. In the long runThe super-normal profit derived by the firm in the short run acts as an incentive for new firms to enter the market, which increases industry supply and market price falls for all firms until only normal profit is made. EvaluationThe benefitsIt can be argued that perfect competition will yield the following benefits:
Perfect competition efficiency2 How realistic is the model?Very few markets or industries in the real world are perfectly competitive. For example, how homogeneous is the output of real firms, given that even the smallest of firms working in manufacturing or services try to differentiate their product. The assumption that producers and consumers act rationally is questioned by behavioural economists, who have become increasingly influential over the last decade. Numerous experiments have demonstrated that decision making often falls well short of what could be described as perfectly rational. Decision making can be biased and subject to rule of thumb ‘guidance’ when consumers and producers are faced with complex situations. Although unrealistic, it is still a useful model in two respects. Firstly, many primary and commodity markets, such as coffee and tea, exhibit many of the characteristics of perfect competition, such as the number of individual producers that exist, and their inability to influence market price. Secondly, for other markets in manufacturing and services, the model is a useful yardstick by which economists and regulators can evaluate levels of competition that exist in real markets. Test your knowledge with a quizPress Next to launch the quizYou are allowed two attempts - feedback is provided after each question is attempted.What are the characteristics of a price taker?A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. Due to market competition, most producers are also price-takers. Only under conditions of monopoly or monopsony do we find price-making.
What are the key characteristics of perfect competition?Summary. A perfectly competitive market is defined by both producers and consumers being price-takers. ... . The three primary characteristics of perfect competition are (1) no company holds a substantial market share, (2) the industry output is standardized, and (3) there is freedom of entry and exit.. What are the 4 characteristics of a perfect competition market?Perfectly competitive markets must have the following characteristics: No barriers to entry and exit, no market influencers, homogeneous products, and complete product transparency.
What are the 6 characteristics of perfect competition?Characteristics of Perfect Competition. #1 – Large Market. ... . #2 – Homogeneous Market. ... . #3 – Freedom to Enter or Exit the Market. ... . #4 – Lower Restrictions and Obligations from Governments. ... . #5 – Perfect Information Availability. ... . #6 – Cheap and Efficient Transportation.. |