When determining if there really is such a thing as perfect competition, there are five main things to look for. First, all firms must sell an identical product. Second, all firms should be price takers. Third, every seller has a small market share and can not influence the market price substantially. Next, buyers and sellers are both fully informed of the nature of the products available. Finally, the industry is characterized by the idea that sellers can enter and exit the market freely (Gallant, 2018). While perfect competition is great in theory, there are almost no markets in the real world that satisfy all of these rigid requirements (“(Im)Perfect”, 2015). In an ideal world, perfect competition would exist and benefit consumers and producers in a number of ways.
Due to the fact that it is nearly impossible to obtain perfect competition in the real world, there are few markets that exhibit a most of the required traits. The agricultural market is one of the best examples we have found of perfect competition. There are many farmers throughout the market that sell the same fruits and vegetables for relatively the same price and do not control the price they sell their produce for. Also, every customer is fully informed of the products they buy from farmers. Suppose a farmer has a bad year for growing corn and cannot sell any corn. That one farmer would not affect the market very much due to the fact there are other farmers to sell the product, so we can say that each farmer has a small market share. People who grow and sell agricultural products also do not face many barrier to exit the market. However, they do face barriers to enter the market with things such as high startup costs and lack of available land to buy. Although the agricultural market is not perfect competition, it is as seemingly close as we can get in the real world.
Another market that exhibits traits of perfect competition is the free software market (“Simple”, 2018). Anyone is free to enter and exit without barriers. All software is accessible to consumers and they are free to do with it whatever they want with no consequences. The software prices are controlled by the market instead of the distributor as well (“Simple”, 2018).
One final example of perfect competition would be the street food vendor market (“Simple”, 2018). While walking down the street in a big city, it is easy to find hundreds, if not thousands, of street food vendors. This satisfies the requirement of perfect competition that there is many buyers and sellers. Each vendor, although they try to differentiate themselves, essentially sell the same food with very slight differences. So consumers can basically go from one vendor to another and have the same choices. It is also hard for each vendor to set their own individual prices due to the amount of competition, so the prices are set by the market instead. There are also not a lot of barriers to enter or exit (“Simple”, 2018). This example is not perfect, but it is close to the definition of perfect competition.
The government has created antitrust laws to prevent powerful producers from creating entry barriers for their weaker competitors (“Guide”, 2017). These laws promote competition between businesses that might otherwise merge and engage in anticompetitive business practices. The government also can create competition by controlling the price a company must charge for their product (“Guide”, 2017). This also promotes competition for markets like monopolies where competition is not already present.
Antitrust Laws were created to protect consumers from harmful business practices. Congress passed the first antitrust law in 1890; it was also known as the Sherman Act. The purpose was to preserve free and unfettered competition as the rule of trade (The Antitrust Laws.) In 1914 there were another laws passed; one was the Federal Trade Commission Act and Clayton Act.
In a perfectly competitive market, the demand curve is perfectly elastic. The perfectly elastic curve is represented by a straight horizontal line. Thus, meaning that a price change would eliminate all demand for a certain product. The demand curve for perfect competition is downward sloping to show that the more the price of a product rises, the more the demand for that product decreases. The supply curve would be inversely proportional to the demand curve and would be upward sloping. These two curves intersect at the equilibrium point.
Perfect competition has a many positives aspects and outcomes for both the consumer and producer. For the producer, there are almost no barriers to enter or exit the market. The goal of the producer in perfect competition is to maximize profit instead of focusing on getting rid of competitors (“Perfect”). There also would be a low cost of production for producers because the equilibrium point for marginal revenue is at its lowest point. Products would also be available at a low cost of for consumers because of the low production costs (Shehzad). For the consumer the outcome of perfect competition is even better. Consumers would be educated on what they are buying and don’t have to deal with illegal pricing tactics from the producers. Perfect competition also provide maximum efficiency for usage and for production of products. Each resource would be put to use in the most suitable condition, and by focusing on maximizing profit, production would be maximized as well. Increased efficiency of products would benefit society and its satisfaction needs (Shehzad). However, since it is nearly impossible to fully create perfect competition, these pros are very idealized.
Although it might not seem like it, negative aspects of perfect competition do exist. First, if every company was only focused on maximizing profit and not focused on their competitors, there would be no innovation or need for advertising. Marketing practices are specifically made to drive out competitors of a company or brand. If there is no need to do this, there would be no need for marketing (“Perfect”). There also would be no need to innovate to create new products to get ahead of a company’s competitors. A world without constant innovation would hold back profit for these companies and would also hold back our society from advancing. Another negative aspect would be how every product sold is the same. Having the same product available for all consumers can stunt trade growth within the market (Shehzad). Although society would be sacrificing advertising and innovation with perfect competition, they would be gaining the the more efficient use of resources, low cost of production, low product costs, no barriers to enter or exit a market, and more consumer trust in businesses overall.
Based on an economic and social welfare standpoint, perfect competition would be ideal for every market. But in reality, perfect competition does not exist. However, in a perfect world, perfect competition would be everywhere. There would be sales that do not use illegal pricing tactics and each seller would create a place where the families on social welfare would have a place to buy what they need. Everyone would have access to the same products at the same price and markets would focus solely on maximizing profit. Perfect competition would benefit both the consumer and producer in many ways. Even though perfect competition would be beneficial in theory, it can not exist in real world business practices. If present in everyday business practice, consumers and producers alike would benefit from perfect competition.
A professional writer will make a clear, mistake-free paper for you!Get help with your assigment
Please check your inbox
I'm Chatbot Amy :)
I can help you save hours on your homework. Let's start by finding a writer.Find Writer