essay of perfect market grade 10

Perfect Markets in General Essay

Perfect market is a situational market that is rare in real life (Rittenberg & Tregarthen, 2011). Perfect competition in the market occurs in a way that it is difficult for any stakeholder to influence the price of commodities. In this case, automobile, beer and corn markets are examples of perfect market models.

A perfect competition market is, therefore, an imaginary situation that is characterized by large number of buyers and sellers. The buyers and sellers are many, but their individual consumer behavior has no impact on the market (Rittenberg & Tregarthen, 2011).

Similarly, the demand of one buyer is so insignificant compared to the total demand in the market and, therefore, no individual behavior can influence the prices. There are few competitive perfect markets in existence where the conditions of the perfect market are strict. (Salemi, & Hansen, 2005, p.29)

In this case, the automobile, beer and corn industries have influenced the buyer selection in their products so that products can be bought at different prices. A good example of perfect competitive market is where many farmers are producing corn.

Moreover, in the automobile industry, many dealers sell similar models of cars that one can barely differentiate. “The firms in these markets are price takers and are characterized by perfect knowledge, freedom of entry and exit of the market” (Salemi, & Hansen, 2005, p.29). There is also non-governmental interference in their activities, lack of excess supply and demand, and less transport costs.

In the beer and automobile industries, the seller has perfect knowledge about the market. Therefore, no one would conduct business at their preferred price other than the equilibrium price. For example, today a person could be assembling cars and then he or she can decide to clear the stock and start something else.

In these market models, all buyers are identical in the eyes of sellers. There are also no advantages of selling products to particular buyers (Salemi, & Hansen, 2005). The beer and the automobile companies have no personal recognition or preference of their buyers.

The prices in these markets are determined strictly by the interplay demand and supply. There is no government intervention in the form of taxes or subsidies, quotas, price controls among other regulations (Salemi, & Hansen, 2005). This factor makes the automobile and beer industries sell all what they supply in the market.

The buyers are able to buy all what they require because there is no deficit in supply. The other conditions that place these products under perfect mobility are factors of production. All factors of production including land, capital, labor, and entrepreneurship can be easily switched from one use to another. In beer, automobile, and corn market, factors of production are assumed to be perfectly mobile.

Further, it is assumed that buyers and sellers are located in one area. As such, they do not incur any costs in transporting their goods. The sellers in these markets cannot, therefore, charge higher prices to cover the cost of transport.

In the perfect markets, the buyers have perfect knowledge of the prices offered by different firms on certain products. The products sold have homogeneity. Perfect competition is advantageous to the society because the price equals the marginal cost of production in each firm. The price offered is reasonable and no single firm monopolizes the market.

Rittenberg, L., & Tregarthen, T. (2011). Principles of economics . Irvington, NY: Flat World Knowledge.

Salemi, M. K., & Hansen, W. L. (2005). Discussing economics: A classroom guide to preparing discussion questions and leading discussion . Cheltenham: Edward Elgar.

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IvyPanda. (2019, August 6). Perfect Markets in General. https://ivypanda.com/essays/perfect-markets/

"Perfect Markets in General." IvyPanda , 6 Aug. 2019, ivypanda.com/essays/perfect-markets/.

IvyPanda . (2019) 'Perfect Markets in General'. 6 August.

IvyPanda . 2019. "Perfect Markets in General." August 6, 2019. https://ivypanda.com/essays/perfect-markets/.

1. IvyPanda . "Perfect Markets in General." August 6, 2019. https://ivypanda.com/essays/perfect-markets/.

Bibliography

IvyPanda . "Perfect Markets in General." August 6, 2019. https://ivypanda.com/essays/perfect-markets/.

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Perfect Competition as a Market Structure

Introduction.

A market or an industry is said to be competitive depending on the key market players, that is, suppliers and consumers. The number of suppliers seeking the demand of consumers in the market determines the competition in the market. The other factor that determines the competitiveness of a market is the barriers to entry and exit into the market in the long run.

The nature of competition in the market depends on the number of buyers and sellers in the market such that when both are many, the market assumes a perfect competition nature or monopoly if there is only one seller. The difference between the two extreme market structures is that industries operating in a purely competitive market have no power to set prices, and therefore, they operate at the prevailing price in the market.

On the other hand, a firm operating in a pure monopoly market enjoys full power to determine the price they charge in the market. A perfectly competitive market or perfect monopoly may be nonexistent in real-world markets, but they are very useful in gauging the level of competition in any given market.

The Meaning of Perfect Competition

According to Aumann (1996, 7), Perfect competition is a market structure that assumes the optimum allocation of resources. The market is theoretical and nonexistent in real life. A perfectly competitive market is defined as a market structure in which there are many buyers and sellers such that no one has the power to set or control market prices.

Firms operating in a competitive market are price takers as they operate on the price that is prevailing in the market. There is no competition concerning price. The competition is determined by the quality of the products sold by a particular seller and the preferences of the buyers.

Characteristic of Perfect Competition

A market is considered to have perfect competition if it is characterized by a number of factors. Firstly, all parties in the market have perfect knowledge of the products offered in the market and the prices attached to them. Secondly, there are many buyers and sellers in the market, and therefore no one is obligated to set the prices, but all take the prevailing price (CliffsNotes, 2010, p. 1). Market entry is also free such that firms could join or leave the market any time they decide, depending on the prevailing condition.

The suppliers can sell as much as they can in the market but only at the market price. They have no authority to make prices. There is also a homogeneity of products that are produced by the firms (Aumann, 1996, 7). There is no advertisement in the market because all parties are price takers, and products are perfect substitutes. The perfect knowledge of prices and products also makes advertisement unnecessary.

Normal and Supernormal Profits in Perfect Competition

Normal profits in perfect competition are earned when a firm reaches an economic equilibrium where average cost equals marginal revenue at the point where the firm maximizes profit (Stigler, 1987, 539). Marginal revenue, price, average cost, and marginal cost are always the same when the firms are at their optimum level of production. Normal profit is the profit that is just enough to enable the firm to continue producing and stay in business because it can cover its costs.

In case the average cost falls below the price, the firm earns a supernormal profit. This happens at a profit-maximizing output but does not occur in the long run. Any amount of profit that exceeds the normal profits is categorized under supernormal profits and is earned in the short run.

Short and Long Run Perfect Competitor Price/Output Diagrams

In the short run, there may be high demand for commodities in the market. This causes the increase in the price of the commodities above the average cost making the firm earn supernormal profits. This attracts many firms into the industry/market. This shifts the supply level in the market higher, causing the price to go down (Aumann, 1996, 7).

The profit earned by the new and the existing firms reduces, thus completing away the supernormal profits. The firm can also earn supernormal loss in the short run if the average cost increases above the price. The situation will be corrected when new firms will leave the market, causing supply to go down.

Based on the diagrams above, we see that it is possible for a firm to earn normal and supernormal profits. In the first diagram, the average cost is below the price, meaning that the firm can make a supernormal profit that is equivalent to the shaded region. This can be represented by Q* (a – b) .

The firm is also earning a normal profit at the point where P=MR=MC . This is the equilibrium level of the firm where normal profits are experienced at the point where marginal cost = marginal revenue at the minimum point of the average cost, as shown in the second diagram.

Perfect Competition and Public Interest

The perfect competition will have a great impact on public interest in some respects. For example, consumers may end up getting poor-quality products or services at high prices.

There is also a lack of product variety, showing that consumers have low sovereignty in choosing what best suits them. This is due to the lack of product differentiation. Poor quality is contributed by the fact that there is no competition concerning commodity design and specification because the price in the market is the same.

Allocative and Productive Efficiency

A firm is said to be efficient if it attains the optimum production level and also the optimum distribution of scarce resources (CliffsNotes, 2010, p. 1). Allocative efficiency in perfect competition occurs when the firm distributes goods and services according to the consumers’ preferences. It occurs at the point where P=MC , that is, price equals marginal cost.

Productive efficiency, on the other hand, occurs when a given amount of inputs produces a maximum volume of commodities. In this case, the output is achieved at minimum average cost and can occur in the long or short run. In this diagram, both allocative and productive efficiency is achieved at the point (Q, P), where P=MC=AC . At this point, AV (average cost is at its minimum) means that productive efficiency is achieved. Allocative efficiency is also achieved at the same point because of P=MC (price = marginal cost)

Perfect competition as a market structure does not exist in a real market situation. However, its characteristics are very useful in measuring the nature of competition in other market structures like an oligopoly, monopsony, et cetera.

Reference List

Aumann, R. J., 1996. Existence of Competitive Equilibrium in Markets with a Continuum of Traders. Econometrical , V. 34, N. 1 (1966): pp. 1-17.

CliffsNotes. 2010. CliffsNotes.com. Conditions for Perfect Competition . USA: Wiley Publishing, Inc. Web.

Stigler, J. G. , 1987. Competition, The New Palgrave: a Dictionary of Economics , First edition, vol. 3, pp. 531–46.

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Characteristics Of Perfect And Imperfect Markets

Market is a place where the buyers and sellers make transactions regarding goods and services. Depending on time, competition and extent of area, markets are classified into several types. On the basis of competition markets are classified into perfect markets and imperfect markets.

Perfectly competitive Markets:

Perfectly competitive market is one which consists of large number of buyers and sellers, uniform price and homogeneous commodities. No single buyer or seller is able to exercise control over the price of a commodity. The price of a commodity is same throughout the market. The following are the characteristics of perfect markets or perfectly competitive markets.

Characteristics of perfect markets:

1) There exists a large number of buyers and sellers. Each buyer buys a main portion of the whole stock of commodities. Similarity each seller sells a negligible portion of the whole stock of commodities. They have no influence over the determination of the price.

2) There prevails homogeneous commodities. The quantity and quality of commodities available in the market are the same. No differences are observed in the size, quality, taste of the Commodities.

3) Both the buyers and sellers will know the prices prevalent in the market. Neither of them can increase or decrease the price of a commodity. So the price line of a perfectly competitive market runs parallel to OX axis.

4) There exists no obstacles for the firms to enter or leave the industry. New firms enter the industry when there are huge profits. Old firms leave the industry when there are huge losses.

5) There exists no transport costs. As a result the price of the commodity is same at any place in the market.

6) Factors of production are freely mobile. They move from one industry to the other until they get higher remunerative prices for their services.

Distinction between pure competition and perfect competition:

‘Pure’ competition is a word introduced by Prof. Chamberlain. Pure competition is said to prevail when there exists large number of buyers and sellers, homogeneous commodities and freedom of admission into and exit of firms from an industry. In addition to these features perfect competition includes perfect knowledge of prices, free mobility of factors of production, absence of transport costs and uniform price as its features.

Both pure and perfect competitions are the two ideal concepts which can’t be found in real world. What we observe in reality is the prevalence of imperfect competition.

Imperfect Competition:

Imperfect competition consists of the features which are opposite to perfect competition. It has some special features.

Characteristics of imperfect markets:

1) There exists a small number of sellers in ‘this market. This enables the sellers to charge the prices as they like.

2) The number of buyers is also small. But its does not mean that buyers are few. The buyers in this market system are divided into several groups. Each group buys goods and services from different sellers.

3) The commodities bought and sold in this market are heterogeneous. They differ in their size, quality, appearance, tastes and durability.

4) The sellers adopt product differentiation and price discrimination. They collect different prices for the same commodity from different buyers.

5) There exists transport costs and selling costs in this market.

6) The consumers may not know the prevailing prices of the commodities in the market.

7) The factors of production are not freely mobile.

8) There prevails different prices for the same commodity in the same region.

Thus, imperfect competition consists of the features which are quite opposite to the perfect competition.

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THE DYNAMICS OF PERFECT MARKETS QUESTIONS AND ANSWERS

• Define the concept market structure. (2)
• How many sellers will one find in a monopoly market? (2)
• In what market are all participants price-takers? Motivate your answer. (4)
• Explain the shape of the individual demand curve under perfect competition. (4)
• Vodacom (6)
• Explain in your own words the message behind the pie-charts shown above. (4)

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Essay on Markets: Top 4 Essays | Economics

In this essay we will discuss about:- 1. Meaning of Markets 2. Features of the Markets 3. Elements 4. Performance.

Essay on Markets  

Essay # 1. meaning of markets :.

The term market structure refers to the type constituents and nature of an industry. It includes the relative and absolute size of firms, active in industry, easiness in the entry into business, the demand curve of the firm products etc.

There are two extremities of the market structure on this basis, on one end there is a market of perfect competition and on the other perfect monopoly market. In between these two extremities there are monopolistic competition, oligopoly, duopoly etc.

ADVERTISEMENTS:

In common usage the word market designates a place where certain things are bought and sold. But when we talk about the word market in economics, we extend our concept of market well beyond the idea of single place to which the householder goes to buy something. For our present purpose, we define a market as an area over which buyers and sellers negotiate the exchange of a well- defined commodity. For a single market to exist, it must be possible for buyers and sellers to communicate with each other and to make meaningful deals over the whole market.

Several economists have attempted to define the term market as used in economics.

Some of them are as under:

According to Curnot, “Economists understand by the term market not any particular market-place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of the same goods tends to equality easily and quickly.”

In the eyes of Prof. Chapman, “The term market refers not necessarily to a place but always to a commodity and the buyers and sellers who are to direct competition with one another”.

In simple words, the term market refers to a structure in which the buyers and sellers of the commodity remain in close contact.

Essay # 2. Features of the Markets:

On the basis above-mentioned definitions we can mention following main features of the market:

(i) Commodity:

For the existence of market, a commodity- essential this is to be bought and sold. There cannot be a market without commodity.

(ii) Buyers and Sellers:

Buyers and sellers are also essential for market. Without buyers and sellers the sale-purchase activity cannot be conducted which is essential part of a market.

(iii) Area:

There should be an area in which buyers and sellers of the commodity live in. It is not essential that the buyers and sellers should come to a particular place to transact the business.

(iv) Close Contact:

There should be close contact and communication between, buyers and sellers. This communication may be established by any method. For example, in olden days this contact and communication was possible only when the buyers and sellers of a particular commodity could come at a particular place.

But now with the developed means of communication physical presence of buyers and sellers at one particular place is not essential. They can contact with, each other through letters, telegrams, telephones, etc. In the boundary of a market we include only those buyers and sellers who can maintain regular close contacts.

For instance, India’s farmers (or sellers of grains) have no close contacts with the consumers (or buyers) of England, hence though they are the buyers and sellers of grains yet do not come under the purview of a market.

(v) Competition:

There should be some competition among buyers and sellers of the commodity in a market.

Essay # 3. Elements of Market Conduct:

(a) seller and buyer concentration:.

Here, seller concentration means in certain industry the number of active firms is very limited and these few firms produce a large part of the total supply. In other words, there firms possess the market power in a sense that any one of these firms can affect the market price by making change in the quantity of its product.

In full competition, each firm produces a very small part of the total production. Hence, it cannot affect the market price. In this type of market, the seller concentration is zero. So, as we move from the perfect competitive market towards pure monopolist market, the quantity of seller concentration increases.

(b) Market Power:

Every competitive firm attempts to get market power by making difference in the product. From economic point of view difference in the product or product heterogeneousness affects the market, structure significantly. In the position of homogeneous product when a seller makes even a slight change in the price of product the consumers begin to purchase the product sold by other producers.

In other words the firm producing homogeneous product has to face the perfectly elastic demand curve. On the contrary in the position of heterogeneous products any single firm can increase some price without being affected due to the preferences of the consumer.

(c) Product Differentiation:

In the perfect competition market all firms sell the same or homogeneous product. But in the market, in reality a single product is sold by the different producers, claiming that all products (such as toothpaste) are not same. The producers bring variety by means of brand name, packaging, size, colour, taste, weight etc. In spite of no locational differences, variety is seen by means of retailer service, home delivery, credit facility etc.

(d) Barriers in Entry:

Seller’s concentration indicates that how some firms acquire dominance in an industry, consequently the real competition between the firms is lessened or limited. If there are some barriers in the entry of new firms, then the prospective competition is also limited.

The types of such barriers are as follows:

(i) Cost profit to the present firm which is not available to the new firms.

(ii) Legal barriers in entry.

(iii) Product difference and advertisement etc. cause the presence of strong preference among consumers for the products sold by the established firms.

(e) Other Elements:

Apart from these main elements, there are some other elements to be considered. One of them is the growth rate of market demand. In this situation the firms are somewhat idle. On the contrary in a rapidly growing industry the firms also become more competitive. In the growing market every firm is struggling and striving for more demand.

If there is more elasticity of the price demand of a product, the firm will be motivated to lessen the price in order to increase ones portion in the total sale. In the condition of oligopoly when a firm decreases price other firms also do the same. Then all firms derive benefit in the condition of more elastic demand. If the product demand is inelastic no firm will tend to change price.

Essay # 4. Market Performance:

Market performance means the evaluation of the derivation of the behaviour of any industry when it behaves differently than the established superior laws of the market. It is assumed that in the position of the perfect competition only an industry can perform well. But when the market is derivated from the condition of perfect competition, then the market behaviour also changes. Now the question arises, as to how a market performance can be evaluated in any industry?

Certain acceptable indicators are as follows:

1. Profitability:

All firms have an objective like profitability, profit maximisation or satisfactory level of profit. But profitability in any industry does not depend only upon the performance of the firm. It also depends upon monopolist power, product diversity, or inefficient use of resources etc. Economists have used the hypothesis of normal profit. It is the rate of profit which makes the firm not to leave the industry. The performance level affects the quantity of profit significantly.

2. Productivity:

It is an index of production of per unit input used, if more production is possible by the same units then there is growth in productivity. Growth in production is an indicator of efficient performance of an industry.

But this index is also not without practical shortcomings. Till we cannot keep the other factors stable, it is difficult to measure productivity of certain means/ inputs, like labour on capital. Besides this the units of labour, capital, or land are heterogeneous, so when a change occurs in the quantity of an input, there is also a change in its quality. For example when we recruit more workers, first we recruit more skilled ones and then the less skilled.

Information about the performance of an industry can be derived from its growth rate also. The measure of growth rate of an industry can be known from the product, employment and wealth creation. But every index creates problems in measuring the performance.

For example, it is possible that in an industry more and more people get employment, or there is a rapid rate of wealth accumulation. But it is also possible that the resources are not efficiently used. Likewise when the growth rate is high we do not have information of production cost, whether it is more or less.

4. Effect on Index:

Now the question arises whether the market structure affects the indexes of market performance. Profitability is one of the many indicators of performance. For example in perfect competition, a firm earns normal profit in long term while in monopoly or market having monopolist power, the firm earns extra-normal profit in long term also.

Excessive seller concentration, barriers in entry and product difference can make firm earn more profit in long term also. Likewise we take growth index. Both in monopoly and oligopoly markets firm produces less than its capacity or there is a position of extra capacity.

5. Ill Effects on Firm Growth:

Thus, the growth of the firm is affected adversely. Productivity and efficiency are associated with each other. In the position of monopoly and oligopoly a firm has extra capacity which means inefficient use of resources and low level of productivity. Lastly, the social performance of a firm is also affected by market structure. In monopoly and perfect competition, consumer and labour, both are exploited. Growth in competition decreases the power of exploitation of the producers.

6. Social Performance:

The performance level of an industry can be evaluated in the item of many social bases. These social bases can be income redistribution or other indicators of social welfare. For example the social performance of the medicine industry can be measured by the decrease in the illness period or death rate.

If the expansion/growth of any industry results in decrease of present inequalities of income in society, or it helps in reducing poverty or unemployment then the performance level of the industry can be called high.

Market Structure Conduct Performance Interrelations:  

In micro economics the equilibrium of the firm and industry is studied. On the contrary industrial economics is more related to change in market structure, resulting in the changes of market behaviour or firm’s behaviour, which ultimately affect their market performance. So, industrial economics can be studied with the help of structure conduct performance approach or model.

Complexity of Interrelations:

According to the economists, the interrelations between the structures, conduct performance are sufficiently complex. To conclude it can be said that market structure affects the behaviour of a firm and behaviour of a firm affects its performance (profitability) in the market.

Related Articles:

• Markets under Monopolistic Competition | Markets
• Monopoly and Perfect Competition | Markets | Economics
• Characteristics of a Perfect Competition | Market | Economics
• Aspects of Monopolistic Competition | Markets

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Gr. 12 T2 ECONOMICS: Perfect Markets

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