Why Is Perfect Competition Often Described as the Ideal...

There are different kinds of market structures in this economy. Perfect competition, as one of them, is often described as the ideal market structure, and only treated as a theoretical ideal. If we compare the perfect competition market with other types of market structure, such as monopoly, monopolistic competition, and oligopoly, it will be obvious that the perfect competition is ideal mainly due to the presence of productive and allocative efficiency. In perfect competition, there are a large number of small firms producing homogenous products, in other words, products produced by one firm is identical to the products produced by other firms in the market. There are also a large number of buyers within the market where they have†¦show more content†¦Productive efficiency is achieved when the firm is producing at the minimum point of average cost. Allocative efficiency is achieved when P=MC. As a result, under perfect competition, productive efficiency is achieved in the l ong run, but not in the short-run, when a firm need not be operating at minimum average cost. Productive efficiency is achieved in both the short run and the long run under perfect competition. At the opposite end of the spectrum of the market structures is monopoly, which is a market with a single seller of a good. There are no substitutes for the good; the monopoly is thereby insulated from competition. There are barriers to entry into the market; any barriers to entry into the market will ensure that the firm can sustain its market position into the future. Unlike the perfect competition, the demand curve for monopoly slopes downward, and the demand curve is regarded as showing average revenue as shown in Figure 7. As monopolist has some influence over price, it can make decisions regarding price as well as output. Therefore, the firm is a â€Å"price maker† and can choose a location along the demand curve. The marginal revenue curve (MR) has a fixed relationship with the average revenue curve. MR shares the intercept point on the vertical axis and has exactly twice the slope of AR. MR is zero at the maximum point of the total revenue curve. As with the firm under perfect competition, a monopolist aiming toShow MoreRelatedWhy Is Perfect Competition Often Described as the Ideal Market Structure? Compare and Contrast with Other Known Market Structures.2253 Words   |  10 PagesIdeal concepts, when implemented into the real world, very often fail to survive. The perfectly competitive market structure is not an exception. The model is based on such strict assumptions that its adaptation into everyday life situations, in most cases, is simply impossible; however it is often described as the ideal. In the long-run, when all the factors of production can vary, given that the maximalisation of earnings is a natural goal behind every firm’s activities, only under the perfectlyRead MoreThe Fit-Concept in Strategic Management Ââ€" an Inappropriate Idea for Companies in the 21st Century?7277 Words   |  30 PagesThomson/Strickland (1998), we find out that operational effectiveness is a helpful tool, but not enough for gaining competitive advantage. Strategies must be developed and it must match the organization in order to become effective. This is a task which is often fulfilled by the management. Then we will go deeper into the concept of fit. Some additional discussions of different perspectives follow and a briefly overview about the research of the six types of fit can be found. After clarifying the meaningRead MoreSupply and Demand and Study Guide20292 Words   |  82 PagesAustralia was not involved in its production. 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Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers Why Is Perfect Competition Often Described as the Ideal... Ideal concepts, when implemented into the real world, very often fail to survive. The perfectly competitive market structure is not an exception. The model is based on such strict assumptions that its adaptation into everyday life situations, in most cases, is simply impossible; however it is often described as the ideal. In the long-run, when all the factors of production can vary, given that the maximalisation of earnings is a natural goal behind every firm’s activities, only under the perfectly competitive market’s conditions, is a firm able to reach optimum revenue and, at the same time, be totally efficient. To fully understand this phenomenon it’s necessary to first define productive and allocative efficiency in order to clearly†¦show more content†¦Therefore firm’s marginal revenue(MR) is equal to its avarage revenue(AR) and the price for which it sells its product(P). In every market structure firm’s resource allocation is determine d by the market price of the product and firm’s cost of production. In the short-run, firm’s avarage revenue will need to be at least big enough to cover its avarage variable costs, however the long-run will require covering all the firm’s costs(variable and fixed), including also the normal profit necessary to keep the firm in the industry. Therefore, in the short-run, depending on these two variables, a firm will either earn a super-normal profit(fig.6.6 a, P1bad) or a sub-normal profit.(fig.6.6 b,dabP2) The industry will set the price either above(P1 in fig.6.6 a) or below(P2 in fig.6.6 b) avarage total costs of production(ATC), however a profit maximising firm will always choose to produce at the point where marginal cost(MC) equates its marginal revenue(MR), which in this case is equal to avarage revenue(AR) and the price(P), indicating the firm’s short-run equlibrium point(fig.6.6a,b points b). A company, even though earning only sub-normal profit, will stay in the industry in order to cover part of its avarage variable costs. In the long-run it will be the short-runShow MoreRelatedWhy Is Perfect Competition Often Described as the Ideal Market Structure? Compare and Contrast with Other Known Market Structures.1896 Words   |  8 Pagesare different kinds of market structures in this economy. Perfect competition, as one of them, is often described as the ideal market structure, and only treated as a theoretical ideal. If we compare the perfect competition market with other types of market structure, such as monopoly, monopolistic competition, and oligopoly, it will be obvious that the perfect competition is ideal mainly due to the presence of productive and allocative efficiency. In perfect competition, there are a large numberRead MoreThe Fit-Concept in Strategic Management Ââ€" an Inappropriate Idea for Companies in the 21st Century?7277 Words   |  30 PagesThomson/Strickland (1998), we find out that operational effectiveness is a helpful tool, but not enough for gaining competitive advantage. Strategies must be developed and it must match the organization in order to become effective. This is a task which is often fulfilled by the management. Then we will go deeper into the concept of fit. Some additional discussions of different perspectives follow and a briefly overview about the research of the six types of fit can be found. After clarifying the meaningRead MoreSupply and Demand and Study Guide20292 Words   |  82 PagesAustralia was not involved in its production. CONTENTS Contents 3 Introduction 5 An introduction to the economic perspective 13 Demand and supply 17 Elasticity 21 Market applications 25 The behaviour of firms and costs 31 Perfect competition 37 Monopoly 43 Monopolistic competition 47 Oligopoly 51 Economic performance, market failure and government intervention 55 Appendix: Guide to working successfully through the unit 63 INTRODUCTION Welcome to Microeconomics 1. In this unit of studyRead MoreEnvironmental Analysis19492 Words   |  78 Pagesof these forces by means of methods we are going to discuss in details later, and this is called the environmental analysis. Managers are also concerned in the ways in which organizations can most clearly identify their current position in the market. 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ChapterRead MoreFundamental Analysis of Hdfc Bank14042 Words   |  57 Pagesprice movement in the market. What is technical analysis? Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a securitys intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. What is fundamental analysis? Fundamental Analysis involves examining the economic, financial and other qualitative and quantitativeRead MoreStrategy Safari by Mintzberg71628 Words   |  287 PagesFormation: Schools of Thought, published by Jim Fredrickson in a collection entitled Perspectives on Strategic Management (HarperCollins, 1990). Bruce used the paper in a course at Trent University and found that it worked well. Why don t you do a book on it? he suggested. Why don t we do it together? Henry replied. They both thought that Joe would make an excellent member of the team. So the safari was launched. We did not, however, write this as a textbook or some sort of academic treatise. FromRead MoreGlobal Marketing6701 Words   |  27 PagesCHAPTER 1 INTRODUCTION TO GLOBAL MARKETING SUMMARY A company that engages in global marketing focuses resources on global market opportunities and threats. Successful global marketers such as Nestle, Coca-Cola, and Honda use familiar marketing mix elements – the four Ps – to create global marketing programs. Marketing, RD, manufacturing, and other activities comprise a firm’s value chain; firms configure activities to create superior customer value on a global basis. Global companiesRead MoreCase Study148348 Words   |  594 Pages978-0-273-73552-6 (web) All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers