Question

what are the characteristic of the perfect market structure? Why is that this market is the only one efficient ?

Answer 1

Perfect Market Structure-It is a market with a large number of buyers and sellers selling identical products such that the total contribution to each buyer and seller to the total demand and supply is negligible.

Characteristics-

1-Many buyers and sellers-There are many buyers and sellers in the market due to which the actions of each buyer or seller has a negligible impact on the overall market price.Each buyer and seller takes the market price as given.

2-Homogeneous Product-Product sold in the market is identical.Each seller can sell all that he wants at the existing price so he has little reasons to charge less price and if charge more buyers will go elsewhere.

3-Free antry and exit of firms-Firms are free to enter and exit the market at any point of time they want.Although entry and exit of firms happen in the short run only,in the long run the number of firms in the market remains the same.

4-Perfect Knowlege-Both buyers and sellers have perfect knowledge of the market,so uniformity in prices of goods exist.

5-Perfect mobility of factors of production-Factors of production are perfectly mobile to move from one industry to another,where they get a higher price.

6-No transportation cost-There is no trasnportation cost,this is made to made prices equal in the entire market.

Perfect market is the only efficient markey beacause of 2 resons-

1-Productive Efficiency-Situation in which output is being produced at the lowest possible cost, i.e. where the firm is producing on the bottom point of its ATC.

At the bottom of ATC,ATC=MC

In case of perfect compection in the long run,production takes place at MR=MC=ATC.

However, in the case of monopoly, the firm is not operating on the lowest point of its AC curve but at some higher point.

2-Allocative efficiency-It occurs where price equals marginal cost in all parts of the economy.

i.e P=MC

When know that in a perfect market competition

MR=MC=P

But thats not the case with monopolist.

In case of monopolist,

  MC = MR, but price does not equal MR.

So,we can conclude that Perfect competion is more efficient than the Monopolist market structure.