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The nature of perfectly competitive markets - Essay Example

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The aim of this paper is to understand and analyze the adjustment process and how it affects the typical firm and the market. The paper describes the notion of the perfect competition and different considerations which are provided in a perfect competition market…
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The nature of perfectly competitive markets
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The nature of perfectly competitive markets

Download file to see previous pages... The paper is objective to present two ways of observing at what the perfect competition mean in terms of neoclassical economics. The very first focus should be on the lack of ability of one agent for affecting prices. This matter can be justified by the fact that one consumer or firm is very small if compared with the entire market and the presence or absence of the firm or consumer does not affect the equilibrium price. The hypothesis of impact of each and every agent on the equilibrium price was done by Aumann in the year of 1964. There are some differences between the approach of Aumann and the normal textbooks (Robert, 1966). The firms or consumers have their own power to decide the prices of their own products but the thing is it does not affect the market. Secondly, the consumers and agents consider the price as their parameters. The results of both the approaches are almost same. Another approach of perfect competition can be achieved in terms of the consumers taking advantage by eliminating the some exchange opportunities that are profitable. The competition in market increases when the arbitrage takes place in market faster. The average market price can be adjusted if the market is more competitive. It also depends on the supply and demand of the products. According to this approach, the meaning of perfect competition is the adjustments occur instantly in perfect ways. Firstly, the notion of the perfect competition needs to be understood. The following properties must be ensured so that a "perfect competition" is possible: many buyers and sellers homogeneous goods full market transparency prevails all market participants are "price taker" market participants have no influence on the price of the goods No transaction costs No taxes free market access In a perfect market, supply equals demand. Thus, there is only one price where the market is cleared. This is called the equilibrium price. On the basis of market transparency, it is not possible to achieve excess profits. This means no profits on the pay related factors (rent, interest, and wages) beyond production. The provider cannot rate any higher price because they would find no buyers and the buyer can not demand a lower price because no company in the market would offer a lower rate. A market consists of potential buyers, who determine what amount of a commodity should be brought into the market (O'Sullivan, 2003). The demand from retailers determines the supply of goods. The market is not tied to a particular place but can be seen as abstract. There are different considerations which are provided in a perfect competition market. The problem with perfect competition markets is that after the companies have entered or left the market, equilibrium sets in. This does not let profits to increase and all the companies involved are stuck in a situation with no improvement. A demand curve can be used to explain this. The following demand curve D shows the relationship between commodity prices and the quantity demanded by the consumer. The demand is determined by the price of the goods. Price is on the Y axis and quantity is on the x axis. Law of demand curve states that other things being equal; the demand decreases if the price rises and if the price drops. Thus, the negative demand depends on price. Demand curve refers to a single company, and measures the correlation between output and market price. The demand curve is not only dependent on the ...Download file to see next pagesRead More
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