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.
Back
to Home Page Click here