Perfect Competition Essay Example | Topics and Well Written Essays - 1500 words

Perfect Competition - analyze ExampleAccording to the research findings the trade with perfect competition is characterized by many small buyers and sellers such(prenominal) that none croup influence food foodstuff conditions all firms atomic number 18 scathe takers. The products sold argon same and have close substitutes and this makes it hard for such a condition to be met for in reality, a market has differentiated products due to scientific innovations. An example of such products includes agricultural products such as a make of wheat. Firms are free to enter or exit the market without any problem and also the factors of occupation are mobile. The market is also based on the assumption that all the participants have perfect teaching regarding the prices and quality of products. The buyers therefore are able to make choices of the products they indispensableness to buy and the producers are aware of what the buyers want hence it is easy to decide on the quantity to produce. Since the participants have perfect information regarding the market and are free to enter and exit at any time, there are no transaction cost incurred in the exchange of goods. The profit maximization of the firms occurs where marginal revenue is equal to marginal cost and the market price is equal to marginal cost. Due to these conditions, it is very rare to have perfect competition although technological advancements are driving markets towards such a situation. For example, the trade in currency or money markets where participants are assumed to have perfect information and currency is same regardless of where it is being traded. A nonher feature film of such a market is non-existence of externalities. According to Nicholson (2005), perfect competition ensures optimum allocation of resources in the economy. Since price is equal to the marginal cost, consumer and producer surplus can be maximized. If a producer finds that the output is not bring in revenue, he/she can top producing the product and put the resources into more profitable exercise especially because there are no barriers to entry or exit. In this situation, no one can be made better kill without making someone else worse off. For example, if production of wheat is not profitable, the producer can shift to production of other grains and in the process may lay off some staff and recruit others with the required skills. Competition also pushes prices down and makes the producers to find ways of producing at minimum cost hence productive efficiency is achieved (Geoff, 2006). The supply curve of a perfect market is the marginal cost curve and the demand curve is the price line which is equal to average revenue and marginal revenue. Since the price remains the same regardless of quantity produced, the demand curve is horizontal. In the short-change run, firms make abnormal profits as total revenue is greater than total costs thus attracting entry of new firms into the market especially due to lack of entry barriers. As firms enter the market, the market supply curve shifts outwards pushing the prices down consequently lowering the profits by firms. Since each firm earns sufficient revenue to cover variable costs, some firms may shut down to quash paying variable costs as revenue is low but they still continue paying fixed costs (Mankiw, 2011). The fixed costs