top-rated free essay

The Characteristics of a Perfectly Competitive Market Structure

By TheVulcan117 Nov 25, 2012 498 Words
Characteristics of a perfectly competitive market structure
The four main characteristics of a perfectly competitive market are as follows: A large number of small firms, identical products sold by all firms, no barriers on entry or exit and perfect knowledge of prices and technology. These characteristics mean that a perfectly competitive firm is unable to exert control over the market, as a large number of perfect substitutes exist for the output produced by any given firm.

The demand curve for a perfectly competitive firm’s output is perfectly elastic. This means that a consumer will not buy a good or service if the price rises, due to not being a necessity. An example could be an airplane ticket since vacation travel is not an essential service. Freedom of entry into and exit out of the industry means that capital and other resources are perfectly mobile and that it is not possible to erect barriers to entry. Perfect knowledge means that all firms operate on the same footing, that buyers know about all possible perfect substitutes for a given good and that firms actually do produce identical products.

A perfectly competitive market or industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. Ensuring that no single firm can exert control over price or quantity. If one firm decides to double its output or halt production, the market remains unaffected. Each firm in a perfectly competitive market sells an identical product. Essentially, this means that the buyers cannot discern any difference between the products, as there are no brand names or distinguishing features that differentiate products by firm. Thus every perfectly competitive firm produces a good which is a perfect substitute for the output of every other firm in the market. As such, no firm can charge a different price than that received by other firms. Changing price would result in buyers switching to other goods that are perfect substitutes. Furthermore, perfectly competitive firms are able to freely enter or exit an industry, as they aren’t restricted by government rules and regulations, start-up costs or other barriers to entry. Perfectly competitive firms don’t incur high start-up cost or need government permits to enter an industry. Likewise it is not prevented from leaving an industry, as is the case for government regulated public utilities. Perfectly competitive firms are also free to acquire without delay and restrictions whatever resources they need e.g. Land and labour. Subsequently, as a result of perfect knowledge, consumers are completely aware of a firm’s prices, such that one firm cannot sell its goods higher prices than those of other firms. Each firm also has information about prices charged by other firms, in order to avoid charging less or more of the market price. Perfect knowledge also extends to technology, so all firms have access to all production techniques, no firm can producer its output faster, better or cheaper than another firm.

Cite This Document

Related Documents

  • Economics Perfectly Competitive Market Structure

    ...of a perfectly competitive firm earning a positive economic profit assume the wages, which the firm pays to its workers, falls. Illustrate the impact of such an event on the price, output and profits of this firm 2. Examine the following statement to see whether it is true or false. If it is true, explain why it is true. If it is false, expl...

    Read More
  • The Behavior of Perfectly Competitive Market

    ...THE BEHAVIOR OF PERFECTLY COMPETITIVE MARKET *We now come to one of the most important topic in econ: how firms respond to the price signals that the market sends them. - common sense would tell that if price goes up – prod’n will increase. * but now, armed with our knowledge about prod’n and cost, we can achieve a much sharper ...

    Read More
  • Features of a Perfectly Competitive Market

    ...Features of a Perfectly Competitive Market According to the model of perfectly competitive markets, the demand curve for wheat should be a horizontal line, which is true for a single firm. In perfectly competitive markets there is no differentiation of products making the firms that reside in these market price takers. Therefore the farmer ca...

    Read More
  • Features of Perfectly Competitive Market

    ...Features of Perfectly Competitive Market The following seven features characterize perfectly competitive free markets: 1. There are numerous buyers and sellers, none of whom has a substantial share of the market. 2. All buyers and sellers can freely and immediately enter or leave the market. 3. Every buyer and seller has full and per...

    Read More
  • Market Structure

    ...factors that the fast-food industry uses to market itself. Workers and employees of this type of industry have to work extremely quick in order to serve and prepare food for hungry customers. Examples of the largest international competitors of the fast-food industry are McDonald’s, Wendy’s, Burger King, Kentucky-Fried Chicken, and Sonic. Th...

    Read More
  • Market Structure

    ...Market structure is defined as the particular environment of a firm, the characteristics of which influence the firm's pricing and output decisions. There are four theories of market structure. These theories are: • Pure competition • Monopolistic competition • Oligopoly • Monopoly Each of these theories produce some type ...

    Read More
  • Assignment: Monopoly and Perfectly Competitive Market

    ... and market equilibrium. 4. Define the elasticity of demand. Assignment 2 There four types of market structures that exist, and these are perfect competition, monopolistic competition, monopoly and oligopoly. These categories have been made to help people understand how businesses operate and how prices, outputs and profits are determined...

    Read More
  • Market Structures

    ...Microeconomics course at University of Phoenix entitled ‘Differentiating between Market Structures ‘is about a transportation company named East-West transportation Inc. The company has four divisions; Consumer Goods, Coal, Chemical and Forest Products. Each division functions in four unique market structures. The four market structures are...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.