Perfectly Competitive Market - Essay Example

? Exam Paper Table of Contents Introduction 3 Main Body 3 Conclusion 11 References 12 Introduction Perfectly Competitive market is a market where there are many buyers and few sellers. No single seller or buyer can influence the price of the market. Perfectly competitive market deals with the homogenous product. For example, production of wheat and sale of the same in the market is an example of perfect competition. The producer produces wheat for sales but is bound to accept the market price for selling the product. In this paper, the demand-supply equilibrium will be determined. Explanation will be given how the perfectly competitive firms response due to changes in consumer demand. Another market structure is Monopoly. In monopoly market there is only one seller in the market. The differences between the characteristics of the two markets will be discussed. In this paper, brief explanation will be given for different types of market structure. Main Body Perfect Competition Demand –Supply Equilibrium The equilibrium is a situation where the market demand is equal to the market supply. This means for a particular industry, the market demand will be equal to the market supply. Suppose the Pizza industry is providing the same supply of Pizza as compared to the demand for the product. In case of market equilibrium, there is no pressure for price change because both the consumers and producers are satisfied in this situation. There is neither excess supply in the market nor excess demand in the market (Machovec, 2002, p.19). In the above diagram, the equilibrium has been shown by the interaction between demand and supply curve. P is the market price and Q is the quantity demanded. Market will produce OQ amount of output and the consumers will demand the same amount of output. So the price will remain same. Due to changes in any of the factors, the entire equilibrium position will get affected. It would result in either excess demand or excess supply. In perfect competition, the firms are price takers. In the short run equilibrium for perfect competition, the price is determined by the demand –supply equilibrium. P1 is the market price and each firm follows the same price. As the price is same for each unit sold the AR curve will be constant and it will be equal to the MR curve. At, MR=MC the firm maximizes its profits. In the following diagram, the profit maximizing output is Q1 and the market price is P1. The firm’s profit is shown by the shaded area. The firm earns supernormal profit because AR is more than AC. Super Normal profit In short run, there are three situations existing in the market. Super Normal Profit: When average revenue is greater than average cost (AR>AC) the firm earns super normal profit. In case of super normal profit, the existing firms earn high profit so the other players will also try to enter into the market. When the new players cut through the competition the firm again starts to earn normal profit (McEachern, 2006, p.43). Normal Profit: When Average Revenue is equal to Average Cost (AR=AC) the firm earns normal profit. Loss: When Average revenue is less than Average Cost (AR Read More