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Characteristics of a Perfect Competition

Characteristics of a Perfect Competition. Perfect Competition

Outline

Characteristics of a perfect competition

Number of firms

Identical goods

Entry barriers

Perfect information

Price takers

Affordable transport

Controls

Short-run equilibrium

Economic profit

Economic loss

Break-even

Characteristics of a Perfect Competition

Perfect competition is a theoretical market structure whereby prices are usually a direct representation of the influences of demand and supply (Agarwal, 2020). The perfect competition market structure has various characteristics. First, it is comprised of a high number of small firms. Due to a high number of small participating firms, individual firms are unable to change prices through supply. The characteristic of identical goods is present in perfect competition. As such, it is difficult to differentiate the products being traded, classifying them as commodities. The availability of identical products ensures that consumers can choose to get products from different firms without realizing or experiencing differences. Further, the market has no barriers to entry or exit, reducing the amount of sunk costs.

Additionally, a perfect competition market structure is characterized by perfect information. As a result, individuals have access to information involving the price of a product from every firm. More so, the information is inclusive of supply and demand. In turn, it allows companies to manufacture similar goods with the same efficiency level being achieved across all companies (Agarwal, 2020). The characteristic of price takers dictates that companies cannot influence market conditions or prices.  Agarwal (2020) notes that for a firm to be a price taker, it must have a perfectly elastic demand curve. A different characteristic is that there are affordable and streamlined options for transport. The efficient transport infrastructure ensures that goods are transported with ease. In turn, the prices are low due to cut costs. Lastly, a perfect competition market structure has no controls. As such, there are no government regulations or price controls that influence the market. Ultimately, the lack of control stabilizes the prices for commodities while promoting the freedom to trade.

Short-run Equilibrium

The short-run equilibrium of a firm occurs when there is no inclination to expand or contract its output (Agarwal, 2020). In this period, a firm can vary its output through changing production variables. Further, the number of firms involved is constant as no new firms are allowed to enter the market structure, while the existing ones are not allowed to exit. In the short-run run equilibrium, an economic profit can be made when the average revenue is higher than the average costs incurred. In this case, the prices of commodities are relatively high, ensuring that they exceed the costs that the firm has. The margin between the costs and revenues dictate the amount of profit that a firm makes. Overall, achieving economic profit is the ultimate goal for every firm.

On the other hand, firms in the perfect competition market structure can make economic losses. The situation is achieved when the total costs exceed the total revenue (Agarwal, 2020). As such, a firm spends more than it is generating, leading to a loss. In most cases, the least total cost is utilized to minimize losses in a firm. Costs can be reduced at the same rate in the perfect competition market structure as all firms are affected equally. Additionally, in the perfect competition market structure, a firm can break-even. The break-even situation occurs when the total costs are equivalent to the total revenue. At this point, a firm does not register a loss or a profit. In some instances, the situation is referred to as a normal profit. The break-even scenario is not good for business as firms aim at maximizing profits.

Reference

Agarwal, P. (2020). Perfect Competition. Intelligent Economist.

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