Perfect Competition



Firms will compete with each other to attract customers in a number of ways. Reducing the price of their products below the price of competing firms to increase sales and profit is known as price competition.
Firms create wants for their products by advertising or by offering free gifts, favourable credit schemes to buy are called non-price competition.
A market consists of all the consumers and producing firms of a particular product or service.  Firms will make decisions on (1) what level of output to produce?  And (2) at what price to sell their products?   These two decisions making will depend on the type of market in which the firm is operating.   Market structure will enable us to understand how much competition there is among firms making a particular product in an industry.
Perfect competition exists when there are many numbers of suppliers and many numbers of buyers.  The perfect competitive market is able to make the best use of the scarce resources. There are many competing firms,    and   the firms providing the best quality goods and services at the lowest prices will attract more customers and will be the most successful firm.    Competition encourages the best use of scarce resources which give the best value for money for consumers. Only the best firm making the best product will be able to survive,    otherwise they will be out of business.  So the resources are used at the most efficient way.  Under perfect competition there is consumers sovereignty (control – consumer gets what he/she wants).  
The characteristics or features  of a perfectly competitive market are as follows.
1. Homogenous products – All the firms produce the same products.
2. Price takers.   There are very large number of buyers and sellers. There will be only one price - market price – and that is beyond the influence of any one- either buyer or seller]
3. Perfect knowledge. Both buyers and sellers will have perfect information.  Buyers will have the knowledge about the prices and products on sale and sellers have the knowledge of latest production techniques. 
4. Freedom to entry and exit.  Firms are free to enter or leave the industry if they wish, and there are no barriers of movement 


Benefits of competition: Firms may be more efficient in such as better quantity, frequency, areas, destinations etc. They may offer relatively lower prices.  They may raise quality and provide more choice.  Moreover they may provide a better entertainment or easy shopping.
Drawbacks of competition: Competition leads to less advantage of economies of scale – leading to higher costs and prices. Lowering profits may obstruct availability of finance to reinvest in the industry/spend on research and development. Possibilities of wastage of machine’s spare capacity of production [unable to integrate] Increased production may cause negative externalities like noise, congestion, pollution leads to social costs or environmental cost on the society as a whole.
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