Perfect Competition Analysis

Topics: Economics, Microeconomics, Perfect competition Pages: 18 (6400 words) Published: December 27, 2012
Perfect Competition Analysis


Table of Contents
Basic structural characteristics5
Infinite buyers and sellers5
Zero entry and exit barriers5
Perfect factor mobility5
Perfect information5
Zero transaction costs5
Profit maximization5
Homogenous products5
Non-increasing returns to scale5
Property rights5
Approaches and conditions5
The shutdown point8
Short-run supply curve9
1.There are large number of buyers and sellers10
2.There are no entry or exit barriers10
3.There is perfect mobility of the factors10
4.The products are homogenous10
Equilibrium in perfect competition11
Figures analysis:12
price and output in the short run13
Short run losses14
The adjustment to the long-run equilibrium14
Effects of a change in market demand15
Pure competition and economic efficiency16
1.Allocative efficiency:16
2.Productive efficiency16
3.Dynamic efficiency:16
Gains from competition17
How realistic is the model?18


In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets say for commodities or some financial assets may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers, and society. We now move on to study the economics of different market structures. The spectrum of competition ranges from perfectly competitive markets where there are many sellers who are price takers to a pure monopoly where one single supplier dominates an industry and sets price. We start our analysis of market structures by looking at perfect competition. Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Nonetheless, there is some value in understanding how price, output and equilibrium is established in both the short and the long run in a market that holds true to the tough assumptions of a world of perfect competition. Economists have become more interested in pure competition partly because of the rapid growth of e-commerce in domestic and international markets as a means of buying and selling goods and services. And also because of the popularity of auctions as a rationing device for allocating scarce resources among competing ends. Pure or perfect competition is rare in the real world, but the model is important because it helps analyze industries with characteristics similar to pure competition. This model provides a context in which to apply revenue and cost concepts developed in the previous lecture. Examples of this model are stock market and agricultural industries. PROBLEM ANALYSIS

Basic structural characteristics

Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific characteristics may include: * Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. * Zero entry and exit barriers – A lack of entry and exit barriers makes it...
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