Preview

Perfect Competition Market Model

Good Essays
Open Document
Open Document
682 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Perfect Competition Market Model
Small businesses might not be successful if risks are avoided, and capitalism thrives on new businesses as part of its cycle to diversify the economy. This discussion will define the perfect competition market model, address the model's critiques, and touch upon the model's implications.
Perfect Competition Market Model Perfect competition (PC) is one of several models used to explain the nature of competition among companies. PC represents an ideal case in which competition leads to the most beneficial outcome for consumers (Block, Barnett & Wood, 2002, p. 51). PC is known as pure competition, and describes a hypothetical market in which no producer or consumer has the market power to influence prices (Investopedia, 2006). The PC model uses the following assumptions:
· Homogeneity – Companies provide goods and services that are perfect substitutes--in other words, identical. Since product differentiation is absent, each company possesses only a small market share.
· Perfect and complete information - All companies and consumers know the prices set by all companies. Buyers know the nature of the product sold as well as the prices charged by each company.
· Equal access - Information is freely available with concern to technology, input prices, output price, and other factors that might affect production decisions. No company has any advantage over any other company in producing output.
· Free entry - Any firm may enter or exit the market as it wishes.
In the PC model companies are "price takers," which means the market sets the price, not the companies (Investopedia, 2006). Companies can sell as much output as they like, without affecting the output's market price. No firm is assumed to produce a significant amount of total industry output; therefore, no single firm has any effect on output price (Block, Barnett & Wood, 2002). As profit motivates each company, the company reaches a production point where price and marginal cost are equal. At this "perfect

You May Also Find These Documents Helpful

  • Satisfactory Essays

    ECON205 Homework09 S09

    • 6135 Words
    • 72 Pages

    Similar to monopolists, firms under monopolistic competition are not price takers. Rather, they face a…

    • 6135 Words
    • 72 Pages
    Satisfactory Essays
  • Better Essays

    Perfect competition is the situation in a market (based on six assumptions), (1) where the elements of a monopoly are non-existent, (2) consisting of numerous buyers and sellers, (3) the market price of commodities are beyond the control of individual sellers and buyers, (4) perfectly competitive firms produce homogeneous products, (5) there is free entry into the market and free exit out of the market, and lastly (6) there is perfect knowledge. If these six assumptions are met, the market will be perfectly competitive.…

    • 2282 Words
    • 10 Pages
    Better Essays
  • Satisfactory Essays

    Unit 41 Business - P5

    • 681 Words
    • 3 Pages

    Perfect competition describes how a set of companies aren’t big enough to control a big chunk of the economic market. There are 4 market characteristics of a perfect competition include a large number of small firms, identical products made sold by all firms, easy to enter and exit the industry market and perfect knowledge of prices and technology. The price in a perfect market is always dictated by the consumers, the output or quality is determined by the producers. There isn’t much room to change prices to beat off competitors as your margins become very small, and if you do not sell much you probably won’t break even. The quality may be a little different, but wouldn’t be significant enough to let the company grow.…

    • 681 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    There are a variety of different business structures that comprise the market in the world today. The most common ones found in the business world today are sole proprietorships, partnerships, and corporations. From these you will also find monopolies and oligopolies. Economists assume there are a number of different buyers and sellers in the market which leads to competition which allows prices to change in response to changes in supply and demand.(1) In many industries you there are substitutes for products, so if one type of product becomes too expensive the consumer can choose an alternative product that is cheaper, or one of better quality. This is called perfect competition within different companies. However, in some industries there are no substitutes for a product. In a market with only one supplier of a good or service, the producer can control the price meaning that the consumer does not have a choice, cannot maximize his or her total utility, and has very little to no influence over the price of the good or service they require. This is called a monopoly, where the single business is the industry. In slight contrast, you have the oligopoly which is at least two companies competing for market share. In an oligopoly, products are usually very similar, if not identical to each other, and in order to make their product more attractive they will lower their prices, forcing the other one out of the market until that firm lowers their price. Finally, the fourth type of business structure is called monopolistic competition. Like an oligopoly, these firms produce similar or identical products where substitute products usually aren’t available, although monopolistic competition is between many firms, where an oligopoly is usually two or three different companies controlling the market. In monopolistic competition, a firm takes the prices charged by its rivals as given…

    • 1173 Words
    • 5 Pages
    Better Essays
  • Good Essays

    Perfect competition describes several small firms competing with one another, many products, many buyers and sellers, and many substitutes. Prices are determined by supply and demand and the producer has no leverage. In a monopoly there is only one producer or seller for a product. Competition to monopolies may be limited to high prices or copyrights. In the oligopoly market…

    • 1412 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    The first market structure is perfect competition. Perfect competition occurs when numerous small firms are in competition with each other. Businesses in a competitive industry produce the socially optimal output level at the absolute minimal possible cost per unit.…

    • 642 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The first structure that was discussed was the Perfect competition. Here the Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. “Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Therefore, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any influence” (Investopedia, 2006). For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.…

    • 845 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    According to the model of perfectly competitive markets, the demand curve for wheat should be a horizontal line, which is true for a single firm. In perfectly competitive markets there is no differentiation of products making the firms that reside in these market price takers. Therefore the farmer can sell as much wheat as he wishes at the market price, but cannot sell any at a higher price because there is no demand for it. This is why the demand curve is a horizontal line at the market price. But in the market supply and demand, when the price of wheat rises, the quantity of wheat demanded falls, and when the price of wheat falls, the quantity of wheat demanded rises. Therefore, the demand curve for the entire wheat market is a diagonal line. Where the demand curve intersects with the supply curve in the model of the entire market is where the market price is set. This is where a single firms horizontal demand curve will be placed.…

    • 175 Words
    • 1 Page
    Satisfactory Essays
  • Better Essays

    The perfectly competitive market is a market in which economic forces operate unimpeded. There are also factors that must occur for a truly perfect competitive market to exist. The first factor is that both buyers and sellers must be price takers. Price takers are those who take the price determined by market supply and demand as given. The next factor of a perfectly competitive market is that there are a large number of companies. Companies need to be large enough to ensure what happens to one company will not influence the business of the other companies. Another factor to a perfectly competitive market is that no barriers exist for entry into the industry. This includes social, political and economic barriers being nonexistent. Products in a perfectly competitive market must be identical, absolutely no distinguishing factors. Complete information must be accessible to everyone in the market to facilitate a perfectly competitive market. Information like prices, products and available technology must be made available by the companies to other companies and individuals. The final factor in securing a perfectly competitive market is that selling firms are profit maximizing entrepreneurial companies. This ensures…

    • 1590 Words
    • 7 Pages
    Better Essays
  • Better Essays

    The four basic market structures in economics are perfect competition, monopoly, monopolistic competition and oligopoly. A market that is in the market of perfect competition, “is a market in which economic forces operate unimpeded” (Colander, 2004). A market that is considered a monopoly is “a market structure in which one firm…

    • 1459 Words
    • 6 Pages
    Better Essays
  • Powerful Essays

    The static view of competition focuses on the market structure as the key determining factor in the performance and behaviour of firms. It is the neoclassical approach of competition, origination from the work of economist’s Cournot and Edgeworth. This traditional view sees market structure as rigidly determining firm 's conduct (its output decisions and pricing behaviour), which yields an industry 's overall performance, such as its efficiency and profitability. Firms limit their behaviour to a certain industry model or strategic logic that is built on frequent price cuts, in order to out-compete rivals and deter entry. An industry is considered competitive depending on its market structure. At one extreme is perfect competition, which is considered perfectly competitive. At the other extreme is a monopoly structure, with a sole producer, characterised by low competition. In between the spectrum is an oligopolistic structure, and a monopolistic structure. These structures embody less competition than in perfect competition, but more than in a monopoly situation. The characteristics of competitive markets are thus large number of firms, or in other words a low…

    • 2218 Words
    • 9 Pages
    Powerful Essays
  • Powerful Essays

    The theory of perfect competition explicitly assumes that there are no entry or exit barriers to new participants in an industry. With free entry, positive economic profits induce new entrants. As these firms enter, the supply curve shifts to the right, causing a fall in the equilibrium price of the product. Entry will stop, and equilibrium will be achieved, when economic profits have fallen to zero.…

    • 1096 Words
    • 16 Pages
    Powerful Essays
  • Good Essays

    The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. If there was no differentiation, the competition would turn into perfect competition. In effect, monopolistic competition is something of a hybrid between perfect competition and monopoly. Comparable to perfect competition, monopolistic competition contains a large number of extremely competitive firms. However, comparable to monopoly, each firm has market control and faces a negatively-sloped demand curve. Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson.…

    • 835 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Marketing and Finance

    • 10065 Words
    • 38 Pages

    3. Strong form EMH contends that prices reflect all available information, public and private (or "inside").…

    • 10065 Words
    • 38 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Profit Maximization

    • 585 Words
    • 3 Pages

    In a perfectly competitive market, producers are price-takers and consumers are price-takers. There are many producers, none having a large market share and the industry produces a standardized product, also free entry and exit of the industry. They produce using the optimal output rule: produce where marginal revenue equals marginal cost as Smith (1904) demonstrated.…

    • 585 Words
    • 3 Pages
    Satisfactory Essays