Question

•Pick an industry which meets the criteria for perfect competition. How does this industry fit into the perfectly competitive model? •Does pure competition, as a market model, have any disadvantages for a) producers, and b) consumers? Give examples to substantiate your response.

Answer 1

There is a market of groceries or fruits & vegetables, that closely resemble to be a perfect competition, because it has the characteristics of free entry and exits and homogeneous products in its category. It makes one price to be charged by the sellers as price takers. So, this industry is made to be an perfectly competitive industry.

For producers, it has the disadvantage that they only earn zero economic profit in the long run. Further, existing producers earning positive profit in the short run, cannot stop other new producers to enter into the market and it works as a disadvantage to them.  Besides, not setting their own price by the producers, also acts as a disadvantage.

For consumers, it has no disadvantage as they get  a market that is efficient in producing the output. Further, they are the price setters in the market and get new producers if existing producers get positive profit. It decreases the price and they get benefited.

For example, in the market of fruits & vegetables, the prices are high, then new producers join the market and it increases the surplus, putting downward pressure on price. It benefits the consumers, but producers as a whole, will be at a loss as their profit will decrease to the level of zero.