Perfect Competition Essay
Should we aim for perfect competition? A perfect competition is characterized by many buyers and sellers interacting in such a way as to produce the highest possible quantity at the lowest price. If one of them produces more or less goods it has no effect on the market supply. This is because the buyers are prone to change from one supplier to the other as the products are homogeneous. Similarly, no individual firm exerts enough market power to influence the market price or else the demand for their output will be zero.
Another key feature of perfect competition is the freedom of entry and exit. Anybody who has perfect knowledge and capital is allowed to enter this market and similarly anybody who is incurring loss can leave it. In the real world it is difficult to achieve perfect competition. It might provide a model showing where to apply revenue and cost effects but it is basically used to compare and contrast the efficiency of the real world.
The assumptions of perfect competition are not valid in today’s world because monopoly and oligopoly have taken its place. It is often seen that suppliers exert some control over market price and seek to exploit their monopoly power. Similarly some consumers may purchase a higher or even a lower percentage of total demand thus creating non-allocative efficiency. In addition there are always barriers to this kind of market where products are far from being homogeneous. Most markets are usually found to produce heterogeneous products.
Perfect competition is rare. Agricultural market can be one of the few examples of this kind. If there is a perfect competition then it can be said that there will be allocative efficiency. However we all know that even allocative efficiency is not present in the real world. Though perfect competition would benefit society in many ways there is always some amount of imperfection essential for the growth of a new businesses, new innovation and economic development. Thus it is difficult to aim perfect competition.
In contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn economic profit in the long run, meaning that a firm cannot make any more money than is necessary to cover its economic costs. Because the price facing a perfectly competitive firm is unrelated to the quantity of output produced and sold, this price is also equal to the marginal revenue and average revenue generated by the firm. If a firm is able to sell any quantity of output for example Rs 8. 50 each, then he average revenue, revenue per unit sold, is also Rs 8. 50. Moreover, each additional unit of output sold, marginal revenue, generates an extra Rs 8. 50. Perfectly competitive industryPerfectly competitive firm P P S D QQ Fig: perfectly elastic demand curve as a result of perfect competition In perfectly competitive markets (such as, say, coal), if you can charge slightly less than your competitors, and still make a profit, you will find your customers will attempt to buy as much as you can produce.