Perfect competition is a market structure in which there are many firms in a similar industry producing identical goods and services. Market structure relates to the organization of firms in the industry. Other types of market structures that include oligopoly, monopoly and monopolistic competition. Comparison and contrast of these market structures is on determinants such as ease in joining or leaving the market, market power, intervention by the government, types of goods and services produced and the number of firms. In perfect competitive market structure, there is production of homogenous products.
Perfectly competitive firms are free to enter or exit the market easily because there are very few barriers to entry. These firms lack the market power in price establishment. They have an obligation of accepting the set market price for their output. Due to this obligation, they are price takers because the sellers in the market does not have control of price to sell his product. Market forces of demand and supply determine the price to sell a product in the market; the firm lacks influence in either of these forces. Firms in this market structure have no government intervention and have an independent decision-making. They are free to make any decision relating to buying and selling of their products. These firms produce identical products making buyers indifferent to the many sellers. In this market structure, there are many buyers and sellers of a similar product. A large number of sellers' condition arises when each firm is so small relative to the total market that no single firm can influence the market price (Tucker, 213). There is all available and relevant information relating to quality of product, supply sources, prices, clearing uncertainty in the market. There is no transport related costs incurred since the firms have relatively equal access to the market. These firms have a horizontal demand curve because the price of the product is the equilibrium price determined by the market forces meaning that the demand curve is perfectly elastic.
Given a chance to create a firm in this market, it would be a bakery. It is ideal because all bakeries in the industry produce similar products that include loaves of bread, cakes among other snacks. Their prices are the same they only differ in packaging and branding. A merit of creating firms in this market is that advertising is not compulsory. It is so because the buyers believe that products from the many sellers are homogenous, and a firm can sell all it wants at the current market price (Baumol & Blinder, 241). It would be successful because there are no barriers to joining the market, and there are no interventions and restrictions by the government.
Extreme scarcity of the principal resource will reduce the production of products in the firms because it is a raw material used in the production. In a perfect competitive market structure, it will have equal impact to all the sellers because they produce identical products. The sellers in the market put the market supply curve in place. With extreme scarcity of this resource, quantity supplied will decrease shifting the market supply curve upwards. Assuming the market demand curve remains the same, the equilibrium price will change with an increase from original equilibrium price (Pe0) to a new price (Pe1). Equilibrium quantity will also change from (Qe0) which was the original equilibrium quantity before the shift of market supply curve to the new quantity (Qe1).
Even though in this market firms lack influence on price of the product, they can decide the level of output to maximise their profits. There are approaches that a firm develops to maximise profits that are total revenue-total cost and marginal approaches. In conclusion, these firms in perfect competitive market structure have equal competitive advantage over one another.
O'Connor, David E. The Basics of Economics. Westport, Conn: Greenwood Press, 2004. Print.
Tucker, Irvin B. Microeconomics for Today. Mason, Ohio: Southwestern, 2013. Print.
Baumol, William J, and Alan S. Blinder. Macroeconomics: Principles & Policy. Mason, OH: South Western, Cengage Learning, 2012. Print.
Dodd, James H, and Carl W. Hasek. Economics: Principles and Applications. Cincinnati: Southwestern Pub. Co, 1948. Print.