Perfect Competition

Answer:
The theoretical free-market situation in which the following conditions are met: (1) buyers and sellers are too numerous and too small to have any degree of individual control over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access to information regarding availability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another. Also called perfect market or pure competition.

The 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.

In the short run
Under perfect competition, firms can make super-normal profits or losses.

In the long run
However, 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.

Conclusion: 1. During this testing time, many of the competitors might go out of business due to incurring heavy losses. So the market share of Gearing up will go up due to exit of competitors. But this is solely possible if gearing up is profitable during this time. This is discussed in the next section. 2. To be able to sustain this period, Gearing Up would need to lower their prices to the extent that are not incurring a loss but are still generating a profit. Also, some competitors might shut down due to incurring losses, which will inturn increase Gearing Up’s market share. Also, some strategies that can be adopted are listed below: a. There is no need to spend money on advertising, because there is perfect knowledge and firms can sell all they can produce. b. There is also maximum choice for consumers. c. There are no barriers to entry, so existing firms cannot derive any monopoly power. d. Only normal profits made, so producers just cover their opportunity cost.