Perfect competition

Ideally, perfect competition is a theoretical market where firms and individuals strive to streamline the allocation of resources to consumers. Neo-classical style market analysts stated that perfect competition would give the perfect outcomes for customers, and the whole society. A competitive market is ideally termed to provide both allocative and productive efficiency. When we talk of allocative efficient, it means that output will always be shown where the marginal cost is equated to average revenue, that is,(Marginal Cost= Average Revenue or MC=AT). This simply indicates that the factors to deal with the price of a product is the same or equals the elements that deal with the marginal revenue of the product. It puts into consideration the inference of the supply curve from where neoclassical methodology relies on. This explains why “a monopoly doesn’t have a supply curve”.  (Azevedo, 2017).

This theory of perfect competition has been traced and recorded to have been thought of and entered markets in the late 19^th century. The first and rigorous definition of perfect competition was given by Leon Walras, who also derived some of its main results. The theory was further in the 1950s by Gerard Debreu and Kenneth Arrow. There are no real markets that are perfect. Those economists/financial analysts who put stock in ideal competition as a helpful estimate to open markets may group them as running from close to perfect to exceptionally imperfect (Koschker, 2016).

Various factors determine the structure of the market of the place. These include the number and how firms are distributed in the market, and the degree of item separation. There are several types of market structures, which are explained, below:

Monopoly– this exists in an industry where a single firm produces a product or products, and there are no chances of any other farm to replace it. The monopolists are the only ones to determine how much they will sell the product. There are no chances of allowing anyone else to join in the selling of the outcome of exiting the market. Also, to ensure maximum profits monopoly will try to maintain entries and exist from the market.

Monopolistic competition – this is a market structure in which there is an enormous number of firms, each having a little segment of the piece of the overall market share and somewhat differentiated items. There are close substitutes for the result of some random firm, so competitors have slight authority over the cost. There are moderately unimportant barriers to entry or exit, and achievement welcomes new competitors into the market (Balakrishnan, 2019)

Oligopoly – this is a market structure where there are a couple of firms delivering items that run from somewhat differentiated to exceptionally differentiated. Each firm is sufficiently huge enough to have an impact on the industry. In this kind of market structure, barriers to entry also exist.

Perfect competition – this is an industry where there are many firms, all with equal responsibilities and no one is large enough to influence others in the industry. Barriers to entry do not exist in this industry.

Section 2

Necessary conditions for perfect competition

The following are the conditions needed for perfect competition

• There should be many producers and consumers to ensure that no one either the producer or consumer can affect the market in case of exit or entry to the industry.
• The consumers should be well informed about the quality, price and availability of products. They should have a vast knowledge of these critical factors to avoid any inconveniences or risks that may arise.
• The products are identical in a perfect competition
• There should be ease when a person wants to enter into the market firm or exit. There are no limited externalities
• Government regulations are never required in a perfect competition market.
• There are no transaction costs in this industry.
• There is no transport cost required
• The firms earn average profits. No firm is more superior to make super-normal profits than the others are.
• No advertising cost is required or promoting the products since the consumers well know the products.
• The prices set by the firm are decided by the market forces of supply and demand.

Section 3:

A Diagram showing perfect competition in an industry/ whole firm

From the diagram, it is well illustrated that individual firms are the price takers and an elastic supply curve clearly shows that

At Q1 a firm maximizes its profits where MC = MR

The profits made by the firm at this price are normal since Average revenue is equal to the Average cost AC = AC

From the above diagram, market price/cost is determined by the demand and supply of the industry.

Therefore, the market equilibrium price is set at P1.

Section 4

Calculating the equilibrium price and the quantity for the farm and market as a whole when given

D_m  = 1000 – 10 P

S_m = 10 P

Step 1: Set the market demand to be equal to the market supply

1000 – 10P = 10P

Step 2: Add 10p both sides of the equation

1000 – 10 P + 10 P = 10 P+ 10 P

1000 + 0 = 20 P

Step 3: Divide both sides with 20 P to get the value of 1 P

1000 / 20 = 20 P / 20

50 = P

Therefore the equilibrium price for the market is $50

Quantity for the market is equivalent to

S_m = 10 P

=50 × 10

=500

Section 5

A diagram showing the demand curve

Section 6

 Producer surplus for the individual firm and consumer surplus for the market is:

Producer surplus is the area that is enclosed by the supply margin and the demand curve

½  × 50 × 500

= 12,500

Section 7

Calculate the number of firms

The total number of firms in the market is calculated by nq* = Q where the number of firms is represented by letter n, each firms output is represented by q, and lastly Q represents the total output.

Q = 12500

q = 50

Therefore n × 50 = 12,500

50n = 12500

n = 12500/50

=250

Section 8

How does this fit in a perfect competition

As clearly shown above the number of firms is five times each firm’s output this displays the characteristics of perfect competition. This will allow the buyers to pick any product from the sellers without preference. The aspect presented here is that the products are homogeneous. Also, a more significant number of firms indicates that there is no discrimination. Having plenty of firms records a more significant amount of products. This, in return, helps the sellers to maximize profits. There are no selling costs under perfect competition.

Section 9

Costs of perfect competition

As indicated earlier, under an accurate competitive market, there is no one among all the economic participants is allowed or have the power to determine or set the market price for a given product. The prices are instead controlled by the market forces of demand and supply. Each seller has no choice other than selling their products with this set amount predetermined at market price. Various factors are required to have been met  for a given market to be called a perfect completion:

Each firm is small like any other one relative to the market, and therefore no one can influence the price market

The product sold and the firs can be substituted.

There is total freedom when a firm wants to join or exit from the market

There must be a piece of bright and perfect information about the prices and quantities.

Benefits of perfect competition

There are chances that each firm will always achieve efficient allocation. This happens when the price of goods or products is equal to the marginal cost used to produce produced goods. Represented by the equation P = MC at this point of equilibrium, the customers have an opportunity to enjoy the products without necessarily sacrificing those with high values.

There is always a probability of firms to achieve efficient production. Under perfect competitions, firms can produce goods at a minimum cost, thus satisfying their customers (Koschker, 2016).

The firms do not need to spend on advertising their products under perfectly competitive markets since the consumers have a vast knowledge of the goods in the market. Therefore, there is no need for firms to allocate resources for advertisements. The money that could have been used to do such promotions is usually saved

Under a perfectly competitive market, the individuals are free to choose the kind of economic activity that needs to be carried out and the products to be produced.

References

Azevedo, E. M. (2017). Perfect competition in markets with adverse selection. Econometrica, 85(1), pp. 67-105.

Balakrishnan, K. V. (2019). Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization. Journal of Accounting and Economics, 67(1), pp. 80-97.

Koschker, S. &. (2016). Perfect competition vs. strategic behaviour models to derive electricity prices and the influence of renewables on market power. OR Spectrum, 38(3), pp. 661-686.