Essay, Pages 4 (789 words)
A market is any place where the sellers of a particular good or service can meet with the buyers of that goods and service where there is a potential for a transaction to take place. The buyers must have something they can offer in exchange for there to be a potential transaction. Market structure: Market structure refers to the factors, such as size of the market, technological, cost and demand conditions and the barriers to entry and exit, that would affect the effectiveness of managerial decisions.
We can also consider the market structure as describing the state of the market with respect to competition. Market structures Monopoly Perfect competition Imperfect competition Monopolistic competition c Oligopoly Overview: Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry. For example , As there are millions of farmers who would produce rice & there are millions of consumers who would consume rice.
In this case not a single buyer or seller could influence the price of rice. Perfect competition is a competitive market. Economist uses the term” competitive market “to describe a market in which there are so many buyers & so many sellers that each has a negligible impact on the market price.
Characteristics of perfectly competitive market
Large number of buyers & sellers: In perfect competition, there must be large number of buyers and sellers.
Each buyer buys a small quantity of the total amount.
Each seller is so large that no single buyer or seller can influence the price and affect the market. According to Scitovsky buyers and sellers are price takers in the purely competitive market. Each seller (or firm) sells its products at the price determined by the market. Similarly, each buyer buys the commodity at the price determined by the market.
Homogeneous product: Under perfect competition, the product offered for sale by all sellers must be identical in every respect. The goods offered for sale are perfect substitutes of one another.
Buyers have no special preference for the product of a particular seller. No seller can raise the price above the prevailing price or lower the price below the prevailing price. Free entry and exit: Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market.
However, such free entry or free exit is possible only in the long run, but not in the short-run.
Perfect knowledge: Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the market conditions. As results, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has no scope.
Perfect mobility of factors of production: The second perfection mobility of factors of production from one use to another use.
This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned. This is essential to enable the firms and industry to achieve equilibrium
Absence of transport cost: Under perfect competition transport, cost does not exist. Since commodities have, the same price it logically follows that there will be no transport cost. In the event of the presence of cost of transport, there will be no single price in the market. Transport cost occurs when there is no perfect knowledge of the market conditions on the part of buyers and sellers. .
No attachment: There is no attachment between the buyers and sellers under perfect competition. Since products of all sellers are identical and their prices are the same a buyer is free to buy the commodity from any seller he likes. He has no special inclination for the product of any seller as in case of monopolistic competition or oligopoly. Theoretically, perfect competition is irrelevant. In reality, it does not exist. So it is a myth Profit maximization for a competitive firm: The goal of any competitive firm is to make profit.
- Three general rules for profit maximization under perfect competition are stated as follows:
- If the marginal revenue is greater then marginal cost the firm should increase the output
- If marginal cost is greater then greater then marginal cost the firm should decrease output
- At profit maximizing level of output, marginal revenue & marginal cost are exactly same
Example: Profit maximization for a perfectly competitive market.