Perfect competition: Perfect competition is the name given to an industry or to a market characterized by a large number of buyers and sellers engaged in the purchase and sale of a homogeneous commodity , with perfect knowledge of market price and quantities
There are some characteristics of perfect competition:
1. Large number of buyers and sellers : In the perfect competition , a large number of buyers and sellers exists exists. However the high population of buyers and sellers fail to affect the prices, and the output produced by a seller or purchases made by the buyer are very less in comparison to the total output or total purchase in an economy.
For Example : Raju's home grown carrots. Raju is one among millions of people who grow carrots …show more content…
No transportation cost : In perfect competition , the existence of the same price is because of zero transportation costs . Due to which, there is no scope of price variation in all sectors of the market.
Equilibrium in perfect competition:
In short run : Under perfect competition, firms can make super-normal profits or losses.if supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise
In long run: However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal …show more content…
Absence of substitutes: Another Important characteristics of monopoly is the absence of substitutes of the products in the market. In addition , differentiated products are absent in the market.
For example : AmoxPlus, in contrast, is a unique product. There are no close substitutes. Cipla Pharmaceutical holds the exclusive patent on AmoxPlus. No other firm has the legal authority to produced AmoxPlus. And even if they had the legal authority, the secret formula for producing AmoxPlus is sealed away in an airtight vault deep inside the fortified Cipla Pharmaceutical headquarters.
3. Barriers to entry: The reason behind the existence of monopoly is the various barriers that restrict the entry of new organizations in the market. These can be in the form of copyrights, ownership etc. some of the barriers that limit the entry of new organizations are :
o Restriction imposed by the government For example: Cipla Pharmaceutical has a few these barriers working in its favor. It has, for example, an exclusive patent on AmoxPlus. The government has decreed that Cipla Pharmaceutical, and only Pharmaceutical,that has the legal authority to produce and sell
There are some characteristics of perfect competition:
1. Large number of buyers and sellers : In the perfect competition , a large number of buyers and sellers exists exists. However the high population of buyers and sellers fail to affect the prices, and the output produced by a seller or purchases made by the buyer are very less in comparison to the total output or total purchase in an economy.
For Example : Raju's home grown carrots. Raju is one among millions of people who grow carrots …show more content…
No transportation cost : In perfect competition , the existence of the same price is because of zero transportation costs . Due to which, there is no scope of price variation in all sectors of the market.
Equilibrium in perfect competition:
In short run : Under perfect competition, firms can make super-normal profits or losses.if supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise
In long run: However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal …show more content…
Absence of substitutes: Another Important characteristics of monopoly is the absence of substitutes of the products in the market. In addition , differentiated products are absent in the market.
For example : AmoxPlus, in contrast, is a unique product. There are no close substitutes. Cipla Pharmaceutical holds the exclusive patent on AmoxPlus. No other firm has the legal authority to produced AmoxPlus. And even if they had the legal authority, the secret formula for producing AmoxPlus is sealed away in an airtight vault deep inside the fortified Cipla Pharmaceutical headquarters.
3. Barriers to entry: The reason behind the existence of monopoly is the various barriers that restrict the entry of new organizations in the market. These can be in the form of copyrights, ownership etc. some of the barriers that limit the entry of new organizations are :
o Restriction imposed by the government For example: Cipla Pharmaceutical has a few these barriers working in its favor. It has, for example, an exclusive patent on AmoxPlus. The government has decreed that Cipla Pharmaceutical, and only Pharmaceutical,that has the legal authority to produce and sell