Perfect Competition(Kevin)

Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared.

Perfect competition has several economic factors that must exist in a perfectly competitive industry, such as:

1.    All firms sell an identical product.

2.    All firms are price-takers.

3.    All firms have a relatively small market share.

4.    Buyers know the nature of the product being sold and the prices charged by each firm. 

5.     The industry is characterized by freedom of entry and exit. 

The perfectly competitive firm makes two decisions in the short run, such as whether to produce or to shut down and if the decision is to produce, what quantity to produce. The firm’s short-run decisions are made after some irrevocable commitments have generated sunk costs. The firm considers only avoidable costs when making decisions. Unavoidable costs have no impact on the decision. So for the firm to produce its revenues need only exceed avoidable costs, not total costs. The profit maximization goal doesn’t require the firm to earn a positive economic profit in the short run.

And for long run decisions are whether to increase or decrease its plant size and whether to stay in the industry or leave it.

For the industry that has best reflects perfect competition in real life is the agricultural industry. The agricultural industry probably comes closest to exhibiting perfect competition because it is characterized by many small producers with virtually no ability to alter the selling price of their products. The commercial buyers of agricultural commodities are generally very well informed and, although agricultural production involves some barriers to entry, it is not particularly difficult to enter the marketplace as a producer.  Farmers know the current market prices for agricultural goods as they are frequently published. Farmers produce a range of homogeneous goods. Many governments intervene in the agricultural market by fixing prices or giving subsidies.

Advantages of perfect competition for the agricultural industry are high degree of competition helps the industry to allocate resources to most efficient use, normal profit made in the long run, firms operate at maximum efficiency, consumers and producer surplus will be maximized. Meanwhile disadvantages of perfect competition for agricultural industry are insufficient profits for investment, lack of product variety, and lack of competition over product design and specification.