Why perfect competition is the best market structure

Powerful Essays
Why perfect competition??

Executive Summary

This report provides information related to the four main market structures and why perfect competition is the most efficient. Features of four market structures and comparison of monopoly and perfect competition.

Perfect completion is most efficient

Subject matter

Details

Conclusions

Introduction
Market structure is best defined as the organizational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing.Traditionally, the most important features of market structure are:
1. Number of Buyers and Sellers:
Number of buyers and sellers of a commodity in the market indicates the influence exercised by them on the price of the commodity. In case of large number of buyers and sellers, an individual buyer or seller is not in the position to influence the price of the commodity. However, if there is a single seller of a commodity, then such a seller exercises great control over the price.
2. Nature of the Commodity:
If the commodity is of homogeneous nature, i.e. identical in all respects, then it is sold at a uniform price. However, if the commodity is of differentiated nature (like different brands of toothpaste), then it may be sold at different prices. Again, if the commodity has no close substitutes (like Railways), then the seller can charge higher price from the buyers.
3. Freedom of Movement of Firms:
If there is freedom of entry and exit of firms, then price will be stable in the market. However, if there are restrictions on entry of new firms and exit of old firms, then a firm can influence the price as it has no fear of competition from other or new firms.
4. Knowledge of Market Conditions:
If buyers and sellers have perfect knowledge about the market conditions, then a uniform price prevails in the market. However, in case of imperfect knowledge, sellers



References: Grant SJ.(2000), Introductory Economics, (7th edn), Pearsons Eucation, UK. http://en.wikipedia.org/wiki/Market_structure http://www.slideshare.net/mithileshtrivedi581/market-structure-and-types-of-market-strucyure

You May Also Find These Documents Helpful

  • Good Essays

    Perfect competition is a type of market structure where a large number of small firms producing identical products compete without any significant impact on prices or supply. There several factors which are followed in this particular model. Goods which are produced by the firms don’t have any product differentiation, in other words, they are homogenous and could substitutes each other in consumptions. As firms don’t have any market power and can’t influence prices due to their small size, rival…

    • 1315 Words
    • 6 Pages
    Good Essays
  • Satisfactory Essays

    MARKET STRUCTURE AND COMPETITION EXERCISES Exercise 1: The own firm’s price elasticity is a measure that evaluates how the firm’s demand changes when it alters the price of the good or service offered, given that the rest of the variables remain fixed. While the cross-price elasticity measures how a firm’s demand changes when some other firm alters its price. Therefore, the second term considers the existence of interrelated firms in the market, that is, the fact that one firm’s actions affect…

    • 592 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Meaning and Definition of Market Market generally means a place or a geographical area, where buyers with money and sellers with their goods meet to exchange goods for money. In Economics market refers to a group of buyers and sellers who involve in the transaction of commodities and services. Characteristics of a market 1. Existence of buyers and sellers of the commodity. 2. The establishment of contact between the buyers and sellers. Distance is of no consideration if buyers and sellers could…

    • 1935 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    discussion will define the perfect competition market model, address the model's critiques, and touch upon the model's implications. Perfect Competition Market Model Perfect competition (PC) is one of several models used to explain the nature of competition among companies. PC represents an ideal case in which competition leads to the most beneficial outcome for consumers (Block, Barnett & Wood, 2002, p. 51). PC is known as pure competition, and describes a hypothetical market in which no producer or…

    • 682 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Perfect Competition

    • 744 Words
    • 3 Pages

    Perfect competition- Is it possible? To claim that something is "perfect" is to say that it cannot be done better. In business and economy it is very common to think that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry. It is a well worked out theory that has been around for over a century. The concept of competition is used in two ways in economics: competition as a process is a rivalry among firms; competition…

    • 744 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Ideal concepts, when implemented into the real world, very often fail to survive. The perfectly competitive market structure is not an exception. The model is based on such strict assumptions that its adaptation into everyday life situations, in most cases, is simply impossible; however it is often described as the ideal. In the long-run, when all the factors of production can vary, given that the maximalisation of earnings is a natural goal behind every firm’s activities, only under the perfectly…

    • 2246 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    Perfect Competition

    • 2940 Words
    • 7 Pages

    A Case Study In Perfect Competition: The U.S. Bicycle Industry Submitted by Jay on Sun, 2006-07-16 22:27. I had an epiphany, as in a sudden insight into reality, in May at a meeting where a long time friend in the industry offered the opinion that the U.S. bicycle industry is in a classic state of perfect competition. My immediate response was "...that sounds like a good thing!" My friend, who went back to graduate school after working in a bike shop, for a major component manufacturer and prominent…

    • 2940 Words
    • 7 Pages
    Good Essays
  • Powerful Essays

    Perfect Competition

    • 1449 Words
    • 6 Pages

    Perfect Competition 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…

    • 1449 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Perfect Competition

    • 641 Words
    • 3 Pages

    of market structures varies diversely from highly competitive markets where there are a large number of buyers and sellers, each of whom having little or no power to alter the market price to a situation of pure monopoly where a market or an industry consists of one single supplier who enjoys considerable control over the market price, unless specific restrictions are placed directly by the government. A market structure such as the Chicken Meat Industry can be deemed as “Perfect Competition (PC)”…

    • 641 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Perfect competition Is a market structure in which small firms take part. All producers sell the same product. There are no barriers to enter the market. All customer and producers have the same information. Firms sell all they produce, but they cannot set a price. They are said to be ‘price takers’ Monopolistic competition Is a market structure in which firms sell similar products nut not identical. There are no barriers to enter the market. Customers and producers have part of the information…

    • 1140 Words
    • 5 Pages
    Good Essays