Perfect competition sometimes is regarded as an ideal market structure because it supports the actual ideology of a free market economy where, for example there is no government intervention. The entrepreneur in perfect competition works independent of other entrepreneurs and each individual buyer or seller does not influence the market, there are perfect substitutes for all goods and the demand is perfectly elastic, hence there is no price rise or fall. As should be, there is a freedom of entry and exit of firms. Both the consumers and producers have a perfect knowledge of market conditions. The demand curve is equal to the marginal revenue curve meaning that the firm sells whatever it produces and there is no inventory tax. Having MR=MC, the firm makes as much profit as possible.
Perfect competition is the most stable market form, and hence the most desirable. It leads to the best possible efficiency for the firm. It works best for both the buyers and sellers and works in accordance to each person’s needs and abilities. It is a condition where each market should be and is used as a model to understand and predict real life situations.
However, Samuelson writes that perfect competition does not faithfully represent many of the facts about modern industry because life in the economic world can never be perfect. There can never be a market close to having perfect conditions for competition. It is true that many markets, such as the ones for raw materials come close to being in perfect competition, they can never truly achieve perfect competition.
When we examine the types of business structures we are looking at the competition in the market that the business operates within. There are four types of market based on the competition: 1. Monopoly 2. Oligopoly 3. Monopolistic Competition 4. Perfect Competition A firm can be called a monopoly if they are the sole supplier to a market place or its market share is more than 25%. Monopolies are ...
This is due to many factors but particularly the dissatisfaction of the characteristics of a perfect competition market as described above. As soon as a firm in a perfect competition decreases its price, it enters the realm of imperfect competition.
Also, in today’s world, a firm spends a lot of money on advertising and PR. A firm that does not spend money on R&D or advertising will not be able to influence buyers and thus will not be in equal competition or market share. Also buyers and sellers do not have perfect knowledge of market conditions. Many firms choose to hide their firms’ business secrets.
From time to time, the government has to intervene as well especially to ensure proper functioning and installation of public goods. A government can also dictate a firm on which lines to run, particularly in countries that are not true democracies.
Also, a good never really has a perfect substitute for itself, nor is the demand curve perfectly elastic for most goods. Individual taste of buyers influences these decisions.
Suppliers are not price takers and aim for profit maximization, often increase/decrease their prices depending upon the elasticity of the good.
MR is not always equal to the demand curve and most firms have inventories for their goods.
In perfect competition, MR=MC=Price and this is the point where profits are maximized. This is hardly possible in real life, the MC curve will either be less than the MR or more, it’s hard indeed for them to be perfectly equal. Some firms operate on short run and do not tend to be perfectly competitive
One reason why perfect competition does not represent the face of the modern industry is because it is so hard to achieve.
... a good or service, and the producer is unable to make a profit (“Perfect Competition;” “The Market Economy”). A firm that operates in a perfectly ... ). In other words, market failure is the absence of perfect competition in which prices are known to automatically move to economic equilibrium and ...