Comparison of Perfect and Imperfect Competition

Comparison of unblemished and faint CompetitionINTRODUCTIONThe Father of Economics Adam Smith in his book The Theory of object lesson Sentiments, wrote about the main characteristics of gentlemans gentleman beings. According to him a human being is very selfish or possesses self-love as well(p) as on that point exists an invisible hand. The concept of self- love in human being is one of the most great factor in the value theory as well as in the development of grocery store. 1Gener tout ensembley a human being carries out economic activities coin bank a point where he thinks that what I am paying is equal to what I am receiving, mankind being get outingly trade or carry out exchange till he feels that what I am gift is less and what I am receiving is much, once he existentises that what I am giving is equal to what I am receiving, he allow stop further trade.This is one of the most important philosophy of consumers and manufacturers. Both the concept is based on sel fish motives of maximising returns in terms of their efforts that is money. Since an miserliness consists of various economic agents with diverse interests, allocating resources optimally becomes an intricate task. Economic planners stimulate two mutually opponent means to solve this allocation problem planning versus disceptation. Which avenue lead be follow by the planners depends crucially on their value judgments.WHAT IS A MARKET?Originally says Jevons, a grocery store was a populacely concern place in a town where provisions and other objects were exposed for sale alone the world has been generalised so as to mean any body of persons who are in intimate melodic line relations and carry on extensive transactions in any commodity.In the words of Cour non, a French economist, Economics understand by the term securities industry not any particular mart placec in which things are bought and sold but the whole of any region in which purchasers and sellers are in such f ree intercourse with one another that the bell of the uniform goods tends to equality easily and quickly.Thus, the inseparables of market areA commodity which is dealt with.The existence of profaneers and sellersA place, be it certain region, country or blameless world.Such intercourse between buyers and sellers that only one monetary value should prevail for the same commodity at the same time.PERFECT COMPETITION correct tilt is a theoretical market structure. gross(a) contention is the world of price-takers. A absolutely combative unshakable sells a homogenous growth. It is so small relation to its market that it cannot affect the market price it simply takes the price as give.Under perfect tense opposition, in that location are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they regard to buy becomes similarly expensive or its quality begins to fall short. advanced firms can easily go into the market, generating additional competition. Companies assoil serious enough profit to stay in business and no more than, because if they were to suck up excess earnings, other companies would enter the market and drive scratch back follow out to the bare minimum.Real-world competition differs from the textbook model of perfect competition in many ways. Real companies try to make their products assorted from those of their competitors. They advertise to try to gain market share. They cut prices to try to take customers away from other firms. They throw out prices in the hope of increasing profits. And some firms are large enough to affect market prices. that the perfect competition model is not an ideal that we should try to achieve in the real world.Features of Perfect CompetitionThere are many small firms, severally producing an identical product .Each too small to effect the market price.The perfect competitior faces a completely horizontal demand curve.The extr a tax revenue gained from each extra unit sold is therefore the market price.Freedom of Entry and Exit this will require low sunk equals.2Diagram for Perfect CompetitionThese factors are unrealistic in the real world. However Perfect Competition is as important economic model to compare other models. It is much argued that private-enterprise(a) markets have many benefits which stem from this theoretical model.In the Industry price is resolved by the interaction of Supply and Demand.The firm will maximise output where MR = MC at Q1In the pine Run Firms will make Normal profits.If Supernormal profits are made virgin firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will renounce the industry causing price to rise.3Assumptions behind a Perfectly Competitive MarketMany suppliers each with an insignificant share of the market this means that each firm is too small relative to the general market to affect price via a change i n its own supply each idiosyncratic firm is assumed to be a price takerAn identical output produced by each firm in other words, the market supplies homogeneous or standardised products that are perfect substitutes for each other. Consumers grok the products to be identicalConsumers have perfect information about the prices all sellers in the market missionary station so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firmAll firms (industry participants and new entrants) are assumed to have equal access to resources (technology, other factor inputs) and improvements in output signal technologies achieved by one firm can spill-over to all the other suppliers in the market. 4IMPERFECT COMPETITION liberalist competition is a competitive market situation where there are many sellers, but they are exchange heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the name suggests, competitive markets that are irregular in nature.Imperfect competition is the real world competition. Today some of the industries and sellers follow it to earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order to earn more profits. It prevails in an industry whenever individualistic sellers have some measure of control over the price of their output. recognize the example of Coco-cola and perpsi together have the majpr share of the market, and frail competition clearly prevails.If a seller is change a non-identical good in the market, then he can raise the prices and earn profits. High profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily clear the market. The major types of continuous tense competition are monopoly, oligopoly and monopolistic competition.Monopolistic Competition This market structure is characterized by a large number of relatively s mall competitors, each with a modest degree of market controlon the supply side. A key feature of monopolistic competition is product differentiation. The output of each producer is a close but not identical substitute to that of every other firm, which helps satisfy diverse consumer wants and needs.Oligopoly This market structure is characterized by a small number of relatively large competitors, each with considerable market control. Oligopoly sellers exhibit interdependent decision making which can lead to intense competition among the a few(prenominal) and the motivation to cooperate through mergers and collisions.Monopoly Monopolies are thus characterized by a lack of economiccompetitionto produce thegoodorserviceand a lack of viablesubstitute goods. Monopoly is an enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible pro fit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition, the market may be so small that it barely supports one enterprise.But if the monopoly is in fact more profitable than competitive enterprises, economists look to that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power.COMPARISION OF VARIOUS MARKETSA distinction has been made between perfect and imperfect competition. A market is said to be perfect when all the potential sellers and buyers are promptly sure of the prices at which transactions take place and all the collide withers made by other sellers and buyers, and when any buyer can purchase from any seller. Same price same commodity same times is essential characteristic of perfect market. 5On the other hand, a market is imperfect when some buyers or sellers or both are not aware of t he prices made by others. Different prices come to prevail for the same commodity at the same time in an imperfect market.STRUCTURENO.OF PRODUCERS AND DEGREE OF PRODUCT specialization develop OF ECONOMY WHERE ITS PREVALENTFIRMS DEGREE OF CONTROLMETHODS PF MARKETINGPerfect CompetitionMany products identical products.Financial markets and agricultural productsNoneMarket exchange or auction.Imperfect CompetitionMonopolistic CompetitionMany producers many real differences in products.Retail trade comparable pizzas, beer.SomeAdvertising and quality rivalry administered prices.OligopolyFew producers little or no difference in product.Steel, chemicalssomeAdvertising and quality rivalry administered prices.MonopolySingle producer product without close substitutes.Franchise monopolies corresponding electricity, water,drugsconsiderableAdvertisingCOMPARISION ON BASIS OF DEMANDIn economics, basicallydemandis the utility for a good or service of an economic agent, relative to his income. Deman d is a buyers willingness and ability to pay a price for a specific measurement of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices. The quantity demanded is the amount of a product people are willing to buy at a certain price the family relationship between price and quantity demanded is known as the demand.The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time.In the above diagram, PART A reflects that the perfect competitor faces a horizontal demand curve, indicating that it can sell all it wants at the going market price. The price elasticity is suddenly elastic. When there is pure competition, since the number of firms is large, no individual has power to influence the market price. Also, since the products are identical from the consumers point of view, the price paid by them cant be different. OX and OY are two axes. A spacious OX is the output and the OY is the price/revenue. At OP price a seller can sell as much as he likes. He cannot charge more and not charge less because then hell lose all his customers.PART B says that an imperfect competition, in contrast, faces a downward sloping demand curve. Meaning that if an imperfect competitive firm increases its sales, it will definitely depress the market price of its output as it moves down its dd curve. The price elasticity is finite elastic. 6COMPARISONON BASIS OF SUPPLYCompetitive firm has school implications for the market supply curve and the law of supply. The primary conclusion is that a perfectly competitive firms short-term supply curve is that segment of its peripheral cost curve that lies above the average variable costcurve.A perfectly competitive firm produces the quantity of output that equates marginal revenue, which is equal to price, and marginal cost, as long as price exceeds average variable cost. The increasing choices of output at alternative prices ge nerate the perfectly competitive firms short- endure supply curve.Consider three key pointsA profit-maximizing firm produces the quantity of output that equates marginal revenue and marginal cost (MR = MC).A perfectly competitive firm is characterized by the equality between price and marginal revenue (P = MR).The law of diminishing marginal returns gives the marginal cost curve a positive slope.Combining all three points means that a profit-maximizing perfectly competitive firm produces the quantity of output that equates price and marginal cost (P = MC).An increase in the price, moves the profit-maximizing quantity to a higher point on the positively-sloped marginal cost curve, and a larger production quantity.A decrease in the price, moves the profit-maximizing quantity to a lower point on the positively-sloped marginal cost curve, and a smaller production quantity.REAL WORLD SCENARIOIn the post independence era, India adopted highly restrictive industrial policy. Indias industri al licensing policy created entry barriers for private enterprises in sectors earmarked for them and wherefore didnt promote perfect competition. Indian planners who believed in the doctrine of infant industry descent provided necessary protection to domestic manufactures from foreign competition by way of tariff barriers.During this regulated regime, however, Indias industrial growth rate was not promising. In India, under Structural Adjustment Programme (SAP), industrial licensing policy was abolished and tariff and quantity restrictions on imports were also dispensed with. Thus the New Economic polity made an effort to promote a competitive market system in India. As a result Indias industrial sector started showing some signs of improvement in terms of growth.7In the real world, situations like perfect market exists for markets for most of unbranded staple goods such as pabulum grain and vegetables. However it should be noted that there is a trend of branding more and more o f such goods also, and in this ways making their markets become more and more like oligopolistic markets.In a monopoly like in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra. In an oligopoly, assume, for example, that an rescue needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well. There are two extreme forms of market structure monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect comp etition means there are few, if any, barriers to entry for new companies, and prices are obstinate by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.CRITICISMS OF PERFECT COMPETITIONThe use of the assumption of perfect competition as the foundation ofprice theoryfor product markets is often criticized as representing all agents as passive, thus removing the active attempts to increase ones welfare or profits by price undercutting, product design, advertising, innovation, activities that the critics argue characterize most industries and markets. These criticisms point to the frequent lack of pragmatism of the assump tions ofproduct homogenity and impossibility to differentiate it, but apart from this the accusation of passivity appears correct only for short-period or very-short-period analyses, in long-period analyses the inability of price to diverge from the natural or long-period price is due to active reactions of entry or exit.Some economists have a different kind of criticism concerning perfect competition model. They are not criticizing theprice taker assumption because it makes economic agents too passive, but because it then raises the question of who sets the prices. Indeed, if everyone is price taker, there is the need for a benevolent planner who gives and sets the prices, in other word, there is a need for a price maker. Therefore, it makes the perfect competition model appropriate not to describe a decentralize market economy but a centralized one. This in turn means that such kind of model has more to do with communism than capitalism.Another frequent criticism is that it is oft en not true that in the short run differences between supply and demand cause changes in price especially in manufacturing, the more third estate behaviour is alteration of production without nearly any alteration of price.CONCLUSIONIn this industrial and competitive world not everyone has a chance to excel. Sometimes there is boom period in the economy when the firms income flourishes while at other times there can be a depression which will create losses for the firm. It is thus a firms ability to fight its resources carefully and feasibly.Why do consumers spend their income on new brands? A classical reference may be in order The love of novelty manifests itself equally in those who are well off and in those who are not. For . . . men get tired of prosperity, just as they are afflicted by the reverse. . . . This love of change . . . opens the way to everyone who takes the lead in any innovation in any country.Thus, in an economy there will be different types of market and each market will have its own pros and cons it just depends on the various innovations they undertake to attract more consumers. Both perfect and imperfect competitions excel in their fields.BIBLIOGRAPHYBOOKSNordhaus, Samuelson. (2008) Economics. Tata Mc-Graw-Hill Publishing Company Limited.Dewett, K.K., Nevalur, M.H., Modern Economic Theory, S. Chand, New Delhi, 2010.WEBSITEShttp//www.economicshelp.org/microessays/markets/perfect-competition/http//tutor2u.net/economics/content/topics/competition/competition.htmhttp//www.economicshelp.org/microessays/markets/perfect-competition/http//www.cci.gov.in/May2011/Advocacy/essay2012/jyoti.pdf1 Dewett, K.K., Nevalur, M.H., Modern Economic Theory, S. Chand, New Delhi, 2010.2 http//www.economicshelp.org/microessays/markets/perfect-competition/3 http//www.economicshelp.org/microessays/markets/perfect-competition/4 http//tutor2u.net/economics/content/topics/competition/competition.htm5 Dewett, K.K., Nevalur, M.H., Modern Economic Theory, S. Chand, Ne w Delhi, 2010.6 Nordhaus, Samuelson. (2008) Economics. Tata Mc-Graw-Hill Publishing Company Limited.7 The Index of Industrial Production (IIP) was 6.2 percent for April-Dec, 1999.