Question

Perfect Competition is one of the four market types.

Describe the key characteristics of this market type.

In your discussion, include the assumptions and implications of this market type.

Explain why this market type is efficient and examples that would most closely resemble perfect competition.

Answer 1

The characteristics of perfect competition are:

- The level of production in the perfect competition does not affect the supply curve. The contribution of all the producers is significant to the market.

- There is no influence regarding the price in the market as the producers in the perfect competition take the price and do not set it. It is one of the important characteristics of perfect competition as the firms do not generally adopt the discrimination of price. And if they do, they lose their consumers to the competitor who is offering a lower price.

- The products in this type of market are alike (homogeneous).

- And as they are alike, both consumers and sellers hold sufficient knowledge and information regarding the quality and price of the products.

The assumptions of a perfectly competitive market are:

- The sellers in a perfect competition take and accept whatever the price is. It is because of the huge count of consumers and sellers who do not let anyone influence the price.

- As we know that the products are similar or identical in nature, they are assumed to be a perfect replacement of one another. And this helps to reduce the possibility of exploitation in the market.

- Sufficient information of the products to both the consumers and sellers provides the assurance that no goods are sold at a price more than its actual market price.

- Dominance to the market by some firms is reduced because in the perfect competition, the firms are not restricted to enter and exit.

The implications of a perfectly competitive market are:

- As the number of buyers is vast in this type of market, there cannot be any changes to the total demand for a commodity due to the change in an individual’s demand. A single consumer cannot control or influence the prevailing price of the commodity and thus, an individual consumer in a perfect competition takes or accepts the price and does not makes it.

- The factor that the market allows freedom to enter or leave to both the existing and new firms only exists in the long run, because some of the factors are predetermined in the short run that might become a barrier to this feature. The implication of this point is important which states that the profit is normal for the firms in the long run. And the new firms will be a part of the long run market if there is any kind of profit in the short run which is abnormal.

A perfect competition market structure is efficient because in the long run, the market price equates to the least of the average cost curve (long-run). The fact that there is no restriction for the firms to enter the market or leave also makes the market efficient. In simple terms, the commodities are made and sold at an average cost which is possibly the lowest.

As we know that it is hard to find examples of markets which possess a perfect competition but the examples that would most closely resemble it would be of the agricultural market. The agricultural market includes many buyers and sellers who can easily compare the prices. The fact that the products offered by this type of market are similar makes it the most suitable example. Another close example to this type of market would be of the foreign exchange markets. The major factor in this type of market is the currency, which is as homogenous as any good in the perfect competition. And it is important for the traders to provide correct information and to connect with a lot of buyers and sellers which makes it an example which would closely resemble perfect competition.