Perfect Competition

Perfect Competition

1. What is Perfect Competition?

   • It is where there are many sellers, each of whom has a very small and insignificant part of the total market
   • It's the ideal market from consumer's and society's of view, as the lowest price will be charged for the goods and scarce resources are used efficiently

2. Assumptions/Characteristics of Perfect Competition

   • There are Many Buyers in the Market
     • They accept the market price, i.e. they are a price taker and each buyer acts independently.
   • There are Many Competitive Sellers in the Market
   • The Goods are Homogenous
     • The goods supplied by each firm are exactly the same. They are perfect substitutes for each other.
   • No Barriers to Entry or Exit within the Industry
   • Perfect Knowledge Exists as to Prices and Profits
   • Each Firm Seeks to Maximise Profits
   • No Collusion Exists on the Market
     • Buyer's don't group together with other buyer's and sellers don't group together with other seller's (to restrict quantity).

3. Why Don't Firms in Perfect Competition Engage in Advertising

   • Homogenous Goods
     • Because the goods are identical, an individual produce cannot differentiate their product, therefore advertising is pointless.
   • Increased Cost and No Additional Revenue
     • Advertising would increase a firm's cost and decrease its profits.
   • Benefits the Entire Industry

4. Long Run: SPECS

   • SNP not earned
   • Scarce Resources are used efficiently as production is at lowest point of AC
   • Cost of Production at point A
   • Equilibrium occurs where MC = MR
   • Quantity Q is sold at Price P

5. Benefits of Perfect Competition

   • Minimum Prices
     • The firm only earns normal profit and therefore the consumer is not being exploited as only minimum prices are charged.
   • No Advertising
     • Resources will not be wasted through advertising and therefore no additional costs will be passed on to the consumer.
   • Production Occurs at Lowest Point of Costs
   • Efficiency is Encouraged
     • Competition between firms will spur efficiency as those producing at lowest point of the AC will survive in the long run.

6. Disadvantages of Perfect Competition

   • No Scope for Economies of Scale
     • Because there are many small firms producing relatively small amounts, no one firm can achieve economies of scale.
   • Little Choice for Consumers
     • Undifferentiated products are unattractive and give little choice to consumers, unlike markets such as clothing and footwear.
   • No incentive to Develop New Technology
     • With perfect knowledge there is little incentive to develop new technology, as it would be shared with other companies.
   • No Research and Development

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