Exam Questions

Exam Questions

Exam Questions

Question 2 (a)

Perfect Competition

Perfect competition is a theoretical model describing a form of competition in the market, characterized by perfect competition unlike any other of its forms is to convince both buyers and sellers that their individual decisions do not affect the price of the market. The market in which there is perfect competition ensures optimal allocation of resources in the under the Pareto optimality.

Perfectly competitive market is a branch of economics consists of a number of competitors offering the same products and services (stock exchange, commodity exchange). Since there is no product differentiation, the price is the same for all competitors. None of our competitors will not advertise its products unless the advertisement can create a difference in the perception of the goods by the customer (e.g., beer and cigarettes), in which case, however, the branch should be considered already in terms of the model of monopolistic competition. Manufacturers achieve different rates of profit in the extent to which they can reduce the cost of production and distribution. Price is given at the market as a resultant of all manufacturers offer and demand of all customers for the product.

Characteristics perfectly competitive market

In a perfectly competitive market price is given by the market and is shaped by the action of the market mechanism as a resultant offers buyers and sellers. This means that none of the actors (both buyers and sellers) are not eligible to change the prices through their individual decision.

Market operators do not have the incentive to ensure that change their pricing, because any change will result in the loss to the entity. If the manufacturer will raise the price of their product, then he cannot sell it because the buyer will have available a sufficient number of competitors at a lower price. Lowering the price and the producer also loses because receives a lower payment for the products that would be able to sell at a higher price from the market. In order to maintain a competitive market in the short term is to get the average variable costs below the market price, and in the long run average total costs below the market price.

Assumption underlying Perfect Competition

The assumption of product homogeneity

Products each manufacturer are identical. Each of the many manufacturers sell the exact same product. At the same time buyers treat and evaluate the products offered by many manufacturers as identical - the buyer does not address any of the benefits of selecting the seller.

The assumption of full mobility of factors of production

Perfectly competitive market, there are no barriers (economic, legal, social) entry and exit to and from the business industries. Factors of production can be moved freely between their various applications.

A large number of sellers and buyers

Perfectly competitive market consists of many producers and many buyers. As a result, the share of each producer in the global supply and the share of each buyer in global demand are relatively small.

Establishment of perfect market information

The model of perfect competition is assumed that all ...