In this task I will be talking about how perfect competition
is always good for consumers and that they are always interested. I will also be
demonstrating how people will tend to start buying stock markets when the share
price increases and how they sell them when the share price decreases. Finally,
I will be discussing the reasons why firms short-run and its long-run average
cost curves are U shaped.
Perfect competition is a hypothetical market structure which
includes 5 main characteristics. Firstly, all firms sell homogenous goods
meaning that they are identical goods, this is a fundamental assumption within
the perfect competitions characteristics. Secondly, both consumers and sellers gain
perfect information of the market, so if the prices changes for a particular
product, both buyers and sellers have perfect knowledge of this as well as
quality and production methods of products. For example if a business reports
positive or negative news, all others would assume that everyone else would get
notified at the same time. Thirdly, there are no barriers for entry and no
barriers to exit into the market, so if there are any businesses that decide
that they also want to join that particular industry they simply can, free of
charge. However, if there any losses being made in that industry, businesses
can also choose to leave which is also costless. Fourthly, there are many
buyers and sellers meaning that each firm only a small part of the total
quantity offered in the market. Finally, the last assumption is profit
maximisation, which means that the main objective for all firms is to maximise
profits and for consumers it’s to be utility maximises which means that they’re
trying to gain the most satisfaction possible. (Sloman, 2003, p. 150)
As a result of all the characteristics above, it can be said
that all firms who operate in perfect or competitive markets are ‘price
takers’, which means that a business must accept the main prices in the market
of its products. Firms have got no choice but to take that price and charge its
product at that particular price. For example, if a firm tries to increase the
price of its product all consumers will leave and will end up consuming
products from a different firm. However, if they decide to lower their price,
all the other firms would follow meaning they would sell exactly the same
quantity of products, just at a lower price.
Perfect competition also includes short and long runs.
Throughout the short run in perfect competition there is not enough time for
new businesses to enter the market. This means that the number of businesses in
that market will remain the same, this is influenced on its costs and revenue
or profit and loss. The long run is when firms have been in the market for a
long period of time meaning new firms can join in easily. If firms are making
super normal profits off a particular product then this will attract new small
firms who think they can make a similar product. This also links in with the
characteristic of perfect completion which is that there are no barriers for
entry/exit. This signals new firms to enter the market, so as new firms enter,
the supply curve in the market would shift to the right. This can be shown in
the image below.
In the short run, firms can suffer losses. Supernormal
profits cannot be made due to the fact that there are no barriers to entry and
no barriers to exit. No barriers to entry means that firms are willing to enter
because they see supernormal profits being made in that industry. The image
below shows a graph where supernormal profits are being made.
But over the long run, they exit the industry. This shifts
the supply curve in, increasing the price and driving economic profits back to
zero. Therefore, in the long run, perfectly competitive firms earn a normal
profit, no more and no less.
Consumers see perfect competition as their best interest due
to the fact that there are no added costs to products or services that they are
fascinated by. Another reason why its inn the consumer’s best interest is the
fact that they have the freedom to go from one producer to another, this means
that firms need to be careful and not upset any consumers with their
product/service. They need to be careful with this because perfect competition
is a consumer based market which means if the business loses customers this
will result in them making losses which then will result in them probably
leaving the market.
The main disadvantage is that sellers have no reason to add
features or improve the product due to the fact that the profit margin is fixed
and the seller can’t raise the price of their product, this is normal in the
market because consumers will move to other sellers. Another disadvantage is
that there are no barriers to entry which means other firms can join easily
this means that firms shouldn’t get comfortable because they themselves know
that they can make losses due to new firms entering the market.
In conclusion, it can be said that perfect competition is in
the consumer’s interest because of the low prices set in the market which will
attract more firms. This means that consumers can easily move from one firm to
another freely if they desire to.