What is Perfect Competition Market, Structure, Features and Examples

A perfectly competitive market is a market in which there are forces of demand and supply that can move freely. A perfectly competitive market is a market where buyers and sellers cannot influence prices, so prices in the market are truly the result of agreement and interaction between supply and demand.

The demand that is formed reflects the desires of consumers, while the supply reflects the wishes of producers. In a perfectly competitive market, sellers and buyers do not have the ability to influence market prices because there is already an inner bond that between sellers and buyers knows the structure and information that exists in a perfectly competitive market.

Characteristics of a Perfectly Competitive Market

A perfectly competitive market has special characteristics, including the following:

1. There are many buyers and sellers, meaning that each party, neither the buyer nor the seller, can influence the market price.
2. The number of goods traded is homogeneous, meaning that consumers assume that the goods traded have the same quality.
3. Complete market information, which means that buyers and sellers know each other about the quality, price, place and time of the goods being traded.
4. Prices are determined by a supply and demand mechanism, which means that buyers are free to make a decision to buy or not to buy goods, as well as sellers, have the freedom to sell goods and services.
5. Free from government interference, which means that the government does not interfere in determining prices in the market.
6. The emergence of a separate power in the market, which means that there is no outside force, either the government or other parties that can influence a decision made by the seller and the buyer.

Examples of perfectly competitive markets include the market for agricultural products, the vegetable market, the date market, the fruit market and others.

Advantages of Perfect Competition

Perfect competition markets also have the following advantages:

1. In a perfectly competitive market, there is no competition between buyers.
2. It is impossible for the seller to hold a price competition with the intention of seizing the market because the market price is something that each producer must accept.
3. The goods offered by the seller will sell for any amount without experiencing a decrease in price.
4. It is impossible to change the form of goods to create a market because of the homogeneity of goods.
5. An information about the market is already known by business rivals and attempts to compete with other companies also yield nothing because the number of competitors is very unlimited.
6. Consumers do not need to be tensed about haggling over the price of goods because the price cannot be influenced by anyone.

Disadvantages of Perfect Competition

In addition to having several advantages, a perfectly competitive market has several disadvantages, namely as follows:

1. Does not encourage innovation. In a perfectly competitive market, technology can be easily imitated by other companies.
2. Limiting consumer choices, because the goods produced by companies are one hundred percent the same, thus making consumers have limited choices to determine the goods to be consumed.
3. Unequal/unbalanced income distribution.

Principles of Perfect Competition

The basic principle of profit maximization in terms of output is; as long as the additional revenue from the company’s expansion (marginal cost), the company continues to expand, the company will not increase production if the marginal cost of expansion is greater than the marginal revenue from expansion.

Profit is the difference between revenue and costs. For example, for a company that produces wood at a market price of 200 per cubic meter, the marginal revenue for each additional one cubic meter is 200. The owner of the company will increase wood production as long as the marginal cost for each additional cubic meter is less than 200. if the marginal cost is greater than 200, the company will increase production.

1. Maximizing Short-Term and Long-Term Profits

In this section will simultaneously be shown examples of figures about the cost of production, sales results and determination of profit. This example will show (i) how to calculate total cost, average cost and marginal cost, (ii) how to calculate total sales, average sales and marginal sales, and (iii) show how a company determines the level of production that will maximize profits.

Before the things stated above are shown and explained, two ways will be formulated to determine profit maximization by a company.

1. Profit Maximization Terms

In the short run, profit maximization by a firm can be explained in the following two ways:

1. Comparing total sales results with total costs
2. Shows a situation where the marginal sales result is equal to the marginal cost.

In the first way the profit is determined by calculating and comparing the total sales proceeds with the total costs. Profit is the difference between the total sales revenue earned and the total costs incurred. Profit will reach its maximum when the difference between the two is maximum. So with this first method, maximum profit will be achieved if the difference in value between total sales results and total costs is the maximum.

2. Maximum Profit in the Short Term

In the short run, a perfectly competitive company (just like any other company) has two kinds of costs (costs), namely fixed costs and variable costs. In the short run, the company has to decide whether to keep producing or not.

If still producing, what is the appropriate level of output (the market price level itself is determined by the market). If the company has decided to produce, the production will be increased as long as the marginal revenue (price) exceeds the marginal cost. This can be seen in the graph below. For example, the market equilibrium price (or MR) = 10 per unit. MR=MC at point E at time Q = 600.

3. Long-Term Maximization

In the long run, all inputs are variables. This situation can be considered the planning stage before the company enters the industry. At this stage the company will decide what production facilities should be built (eg the optimal amount of fixed cost). In the long term, the company is still trying to maximize profits. The price is set by the market and is equal to MR. output will increase as long as MR < MC. Maximum profit is reached when MR = MC.

Efficiency In Perfect Competition

In perfect competition, the two types of efficiencies described above will always exist. It has been explained that in the long run a firm in the perfect competition will earn a normal profit, and this normal profit will be achieved if the cost of production is the minimum. Thus, in accordance with the meaning of productive efficiency that has been explained in the long term, productive efficiency is always achieved by companies in perfect competition.

It has also been explained that in perfect competition price = marginal sales revenue. And in maximizing profit the condition is that marginal sales result = marginal cost. Thus in the long run this situation holds price = marginal revenue = marginal cost. This similarity proves that a perfectly competitive market also achieves allocative efficiency. From the fact that productive efficiency and allocative efficiency are achieved in a perfectly competitive market.

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