Perfect competition and How to Apply in Our Market
– Perfect competition –
There are different methods whereby people compete in the labor market. In this article, we will explain a perfect competition and the strategies you will need to join one.
What is the Perfect Competition?
A Pure or perfect competition can be defined as a theoretical market structure centered on this basic criteria, all company sell an identical product (the product is a “commodity” or “homogeneous”).
All firms are price takers (they cannot influence the market price of their product); market share has no influence on price.
Buyers have complete or “perfect” information – in the past, present and future – about the product being sold and the prices charged by each firm; resources such labor are perfectly mobile; and firms can enter or exit the market without cost.
This can be contrasted with the more realistic imperfect competition, which exists whenever a market, hypothetical or real, violates the abstract tenets of neoclassical pure or perfect competition.
Since all real markets exist outside of the plane of perfect competitions model, each can be classified as imperfect. The contemporary theory of imperfect versus perfect competitions stems from the Cambridge tradition of post-classical economic thought.
How it Works
Perfect competitions are a yardstick, or should I say an ‘ideal type’, to which real-life market structures can be linked.
Perfect competitions are supposedly the opposite of a monopoly, in which only one company makes available a good or service and that company can charge whatever price it wants since consumers have no substitutes and it is difficult for would-be competitors to enter the marketplace.
Under perfect competitions, there are numerous buyers and sellers, and prices show supply and demand. Firms get just enough profit to stay in business and no more. If they were to get enough profits, other firms would enter the market and drive profits down.
Characteristics of a Perfect Competition
Below are the characteristic of perfect competitions
- All firms sell an identical product.
- All firms are price-takers.
- All firms have a relatively small market share.
- Buyers know the nature of the product being sold and the prices charged by each firm.
- The industry is characterized by freedom of entry and exit (no barriers).
How Realistic is the Perfect Competitive Model
In reality, it is much more about theory than practical. This extreme spectrum of market structure.
However, it is said that being perfectly competitive is the position that the company should be or likewise due to the competences it can bring to the economy. Scarce resources would be allocated well.
It is said it doesn’t have to be perfect competitions but in real life, competition should have the same characteristics such as
- Many firms in the market
- Few barriers to entry and exit
- Incentives to cut costs
- profits will be lower compared in markets than monopoly power
Advantage of a Perfect Competition
The advantages of perfect competition are as follow:
- The chances of consumer exploitation are minimal in case of this sort of market structure because in perfect competition sellers do not have any monopoly pricing power therefore, they cannot affect the price of the product or charge higher than the normal price from consumers.
- Another advantage of perfect competition is that consumer gets standardized product irrespective of the place of purchase of a product, so for example, if a consumer is living in city A and he or she travels to city B and he or she requires soap which normally has perfect competition then the consumer does not have to worry about the quality of the product because the product will remain same whether consumer purchase it from city A or city B.
- Perfect competition is consumer-oriented market implying that consumer is king in case of this type of market structure and sellers cannot displease the consumer because the consumer will quickly shift from one seller to another, hence as far as consumers are concerned perfect competition market structure gives them pleasure of shifting from one seller to another if they are not satisfied from the product or sellers services.
- The biggest disadvantage of this type of market structure is that there is no incentive for sellers to innovate or add more features to the product because in case of perfect competition profit margin is fixed and seller cannot charge higher than the normal price which is prevailing in the market because the consumer will move to other sellers hence sellers keep selling standardized product at price fixed by market forces of demand and supply
- Another disadvantage of perfect competition is that there are very few barriers to entry implying that any firm can enter the market and start selling the product, hence old firms cannot afford to be complacent because chances of losing market share to new firms always loom over them.
- In the case of perfect competition firm which has the best location is likely to generate more sales than then firm which is not located in a prime location and hence location playing its part rather than customer service of the seller or product features is a limitation in perfect competition.
A Pure or perfect competition is a theoretical market structure centered on this basic criteria, all company sell an identical product (the product is a “commodity” or “homogeneous”).
This article has been able to explain the several methods where people can compete in the labor market and I hope it was quite helpful.
Do well to share this with others if you found it useful.