Prefect competition is a market in which there are many firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price 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. 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. Key characteristics
Perfectly competitive markets exhibit the following characteristics: 1.
There is perfect knowledge, with no information failure or time lags. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. 2.
There are no barriers to entry into or exit out of the market. 3.
Firms produce homogeneous, identical, units of output that are not branded. 4.
Each unit of input, such as units of labour, are also homogeneous. 5.
No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. 6.
There are a very large numbers of firms in the market.
There is no need for government regulation, except to make markets more competitive. 8.
There are assumed to be no externalities, that is no external costs or benefits. 9.
Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
Explanation of the Assumptions behind Perfectly Competitive Market Many suppliers each with an insignificant share of the market – this means that each firm is too small relative to the overall market to affect price via a change in its own supply – each individual firm is assumed to be a price taker. An identical output produced by each firm – in other words, the market supplies homogeneous or standardized products that are perfect substitutes for each other. Consumers perceive the products to be identical. Consumers have perfect information about the prices all sellers in the market charge – so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm. All firms (industry participants and new entrants) are assumed to have equal access to resources (technology, other factor inputs) and improvements in production technologies achieved by one firm can spill-over to all the other suppliers in the market. There are assumed to be no barriers to entry & exit of firms in long run – which means that the market is open to competition from new suppliers – this affects the long run profits made by each firm in the industry. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long term. No externalities in production and consumption so that there is no divergence between private and social costs and benefits Total Average and Marginal Revenue
The revenue of a firm jointly with its costs ascertains profits. Now let us discuss the concepts of revenue. The term revenue denotes to the receipts obtained by a firm from the scale of definite quantities of a commodity at various prices. The revenue concept relates to total revenue, average revenue and marginal revenue. 1.
Total Revenue – It is the total sale proceeds of a firm by selling a commodity at a given price. If a firm sells 3 units of an article at $ 24, its total revenue is 3 x 24. Thus total revenue is...
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