In the short run, production factors remain stable for a short period of time. New companies are not able to freely enter or leave the market. At the same time, prices are formed based on the interaction of supply and demand. Firms cannot change their production capacity and size.
In long-run perfect competition, factors russian business email list of production can change. New firms can enter and exit the market easily. Firms can adapt by changing their size and production capacity. Long-run economic profits are minimal, and prices of goods are set based on the cost of production.
In pure perfect competition, the industry consists of a large number of companies and buyer segments that cannot directly influence price formation. In addition, the product range is completely interchangeable. In conditions of pure perfect competition, the cost of goods depends only on demand.
Types of perfect competition
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Pure perfect competition is a situation where sellers and buyers make transactions and neither of them has a significant influence on prices. This type of market is typical for niches with a low level of monopolization. A striking example is the producers of consumer goods: food, clothing, household and household goods.
In conditions of perfect market competition, the struggle for the consumer is based on constant improvement of product quality, optimization of business processes and reduction of enterprise costs. In conditions of imperfect competition, certain companies have market power and can control sales volume.
In the automotive industry, customers may be willing to pay more for the opportunity to buy an imported car because the manufacturer provides a certain level of service and reliability. Thus, this market is an example of free competition.
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The Importance of Perfect Competition for the Market
This market development scenario is aimed at creating optimal conditions for the production and consumption of goods. Let us present it in the form of a logical sequence:
Costs = Average Costs = Product Price = Revenue Volume
If this formula is observed, then the industry is in complete equilibrium. However, in practice, there is no example of a market of perfect competition that meets all these criteria. Business operates on the basis of the principle of imperfect. At the same time, this approach benefits entrepreneurs, since the market of the first type provides an opportunity to maintain economic equilibrium and increase the company's income through improving the quality of service and using advanced technologies.
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The Reality of Perfect Competition
Because of differentiation in production, marketing, and sales, competition in the real world differs from the theoretical benchmark. For example, the owner of a small organic grocery store has the opportunity to advertise grain used to feed cows, which in turn produce natural manure to fertilize soybeans without genetically modified components. This makes the company's product unique.
The first two criteria (homogeneity of products and consumers) differ from the ideal in practice. But for the last two criteria (information and mobility), global technological and trade transformations increase the availability of data and resources. On the one hand, the reality is very different from the theory, but on the other, the model remains useful because it can explain different types of behavior.
The Reality of Perfect Competition
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Companies try to increase brand value by using marketing that differentiates them from their competitors. They advertise to establish a price advantage and capture market share.
Many industries have significant barriers to entry. For example, high entry costs (as in the automobile industry) or high government standards (as in utilities). All of this limits the ability of companies to enter/exit these industries. Despite the increase in consumer awareness, there are only a few industries where the buyer has a complete picture of all the products available and their prices.
There are barriers to development in a situation of perfect competition. In agriculture, this model is best implemented due to the presence of many small producers who have almost no influence on the setting of prices. Commercial buyers of agricultural products are usually well informed about the goods. As in any other area, in agriculture there are some barriers to entry, but becoming a producer and entering the market is not too difficult.