Perfect Competition

Perfect Competition

            Perfect competition is a market structure with large number of buyers and sellers. There are no barriers to entry into the industry. Firms sell identical products that are perfect substitutes each other. In addition, they are well informed about prices and no have government intervention. Transport cost is negligible hence do not affect pricing. Price determined by the market must be accepted by the buyers and sellers. They are said to be price takers. Therefore, firms have no market power.

            Each firm in perfect competition seeks to maximize their profit, which equals total revenue minus total cost. Total revenue for a firm is the selling price times the quantity cost [ TR=(P*Q) ] . Total cost is the opportunity cost of production, which includes normal profit. Average revenue tells us how much revenue a firm receives for the typical unit sold. The average revenue equals the price of the good in perfect competition. Marginal revenue is the change in total revenue from an additional unit sold. For competitive firm, marginal revenue equals the price of the good.

In the short run, firms can make super-normal profits or losses under perfect competition. The firm has fixed resources and maximizes profit or minimizes loss by adjusting output. When a firm operates in a perfectly competitive market, its supply curve is its short-run marginal cost curve above average variable cost. The firm should not produce, but should shut down in the short run if its loss exceeds its fixed costs. By shutting down, its loss will just equal those fixed costs. The shut down point is the level of output and price at which the firm just covers its total variable cost. For perfect competition, marginal revenue is equal to price as the firm is facing a perfectly elastic demand. 

Entry and exit is possible in the long run of perfect competitive. Long run firms are attracted into the industry if the supernormal profits are making by the incumbent firms. This is because there are no barriers to entry and 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 freely to exit, and this will shift the industry supply to the left, which increase price and allows those left in the market to derive normal profits.
                       

            In perfect competition, optimal allocation of resources helped by high degree of competition. Lower price charged for the consumers. Consumer and producers surplus are maximized. This is because the change in demand leads extra supply. But insufficient profit for investment is one of the disadvantages in perfect competition. Besides that, perfect competition cause unequal distribution of goods and income. If there are externalities in production or consumption there is likely to be market failure without government intervention Competitive Markets. Due to the availability of many brands of the handsets in market, sellers share the market to comparatively smaller shares since the products are identical and serve the same intentions. The handsets are in this case standardized due to the functionality aspect they provide to the buyers. The government does not adjust the prices of the mobile phones in ties industry other than the normal taxes on business. The competitive aspect in this sector is mainly via prices such that the handset selling firms compete mainly using the prices (Lee, 2003). This is the ideal competitive environment where the products being sold are homogenous.          

             From the Globe and Mail, deals with lamb prices in Canada. The article indicates that because the Orthodox and Western Christian Easters fall on the same Sunday in 2010, the demand for lamb and braided bread has gone up. And while there is a shortage of lamb there doesn't appear to be a shortage of bread. Lamb prices are up 22% over last year. Lamb producers in Alberta have been trying to convince people to take up the craft of raising sheep and hope that promise of higher prices will be an incentive.