In this task I will be talking about how perfect competitionis always good for consumers and that they are always interested.
I will also bedemonstrating how people will tend to start buying stock markets when the shareprice increases and how they sell them when the share price decreases. Finally,I will be discussing the reasons why firms short-run and its long-run averagecost curves are U shaped. Perfect Competition Perfect competition is a hypothetical market structure whichincludes 5 main characteristics. Firstly, all firms sell homogenous goodsmeaning that they are identical goods, this is a fundamental assumption withinthe perfect competitions characteristics.
Secondly, both consumers and sellers gainperfect information of the market, so if the prices changes for a particularproduct, both buyers and sellers have perfect knowledge of this as well asquality and production methods of products. For example if a business reportspositive or negative news, all others would assume that everyone else would getnotified at the same time. Thirdly, there are no barriers for entry and nobarriers to exit into the market, so if there are any businesses that decidethat they also want to join that particular industry they simply can, free ofcharge. However, if there any losses being made in that industry, businessescan also choose to leave which is also costless. Fourthly, there are manybuyers and sellers meaning that each firm only a small part of the totalquantity offered in the market.
Finally, the last assumption is profitmaximisation, which means that the main objective for all firms is to maximiseprofits and for consumers it’s to be utility maximises which means that they’retrying to gain the most satisfaction possible. (Sloman, 2003, p. 150)As a result of all the characteristics above, it can be saidthat all firms who operate in perfect or competitive markets are ‘pricetakers’, which means that a business must accept the main prices in the marketof its products. Firms have got no choice but to take that price and charge itsproduct at that particular price. For example, if a firm tries to increase theprice of its product all consumers will leave and will end up consumingproducts from a different firm. However, if they decide to lower their price,all the other firms would follow meaning they would sell exactly the samequantity of products, just at a lower price.
Perfect competition also includes short and long runs.Throughout the short run in perfect competition there is not enough time fornew businesses to enter the market. This means that the number of businesses inthat market will remain the same, this is influenced on its costs and revenueor profit and loss. The long run is when firms have been in the market for along period of time meaning new firms can join in easily. If firms are makingsuper normal profits off a particular product then this will attract new smallfirms who think they can make a similar product.
This also links in with thecharacteristic of perfect completion which is that there are no barriers forentry/exit. This signals new firms to enter the market, so as new firms enter,the supply curve in the market would shift to the right. This can be shown inthe image below.In the short run, firms can suffer losses. Supernormalprofits cannot be made due to the fact that there are no barriers to entry andno barriers to exit. No barriers to entry means that firms are willing to enterbecause they see supernormal profits being made in that industry.
The imagebelow shows a graph where supernormal profits are being made.But over the long run, they exit the industry. This shiftsthe supply curve in, increasing the price and driving economic profits back tozero. Therefore, in the long run, perfectly competitive firms earn a normalprofit, no more and no less.Consumers see perfect competition as their best interest dueto the fact that there are no added costs to products or services that they arefascinated by.
Another reason why its inn the consumer’s best interest is thefact that they have the freedom to go from one producer to another, this meansthat firms need to be careful and not upset any consumers with theirproduct/service. They need to be careful with this because perfect competitionis a consumer based market which means if the business loses customers thiswill result in them making losses which then will result in them probablyleaving the market. The main disadvantage is that sellers have no reason to addfeatures or improve the product due to the fact that the profit margin is fixedand the seller can’t raise the price of their product, this is normal in themarket because consumers will move to other sellers.
Another disadvantage isthat there are no barriers to entry which means other firms can join easilythis means that firms shouldn’t get comfortable because they themselves knowthat they can make losses due to new firms entering the market. In conclusion, it can be said that perfect competition is inthe consumer’s interest because of the low prices set in the market which willattract more firms. This means that consumers can easily move from one firm toanother freely if they desire to.