Characteristics of Pure Competition

Characteristics of Pure Competition 1.0 Introduction Basic microeconomic theory states that firms should seek to maximize profits and that this is achieved where marginal revenue is equal to marginal cost. A number of assumptions underpin this theory, including the assumptions that firms clearly understand the nature of the demand for their products, and why people buy, and that they are willing and able to control production and sales as the model demands. In reality, decision makers do not have perfect knowledge and production and sales are affected by suppliers and distributors. However, this basic theory has resulted in the development of market models and characteristics of these in respect of barriers to entry into the industry, the number of firms in the industry, whether those firms produce a standardized product or try to differentiate their products from those of other firm. At the early 1920’s, only two distinct market models are present in the economic studies which are Pure Competition and Pure Mon opoly. However, economist found out that most firms operate in markets that fall between the extremes of pure competition and pure monopoly. These firms do not face competition from numerous rival producers all selling a homogeneous product at a single price. Instead, most firms in the real commercial world face varying degrees of competition. In some cases, there are competitions offering more or less identical products; in other instances, firms produce and sell differentiated products. In the latter case, a competitor’s product is merely an attractive substitute. In the real commercial world, there may be numerous competitor, or there may be only a few other sellers in a given market. The need of for a more accurate world for markets of this type of this type led to the development of ‘imperfect market’ to refer to such markets. Imperfect competition refers to markets lying in between the two extreme forms of markets, pure competition and pure monopoly. In ord er to bridge the gap of these extreme forms of market structure, two economists, Joan Robinson of Cambridge University of England and Edward Chamberlin of Harvard University in the U.S.A., introduced independently a third market world to explain and illustrate the theory of imperfect competition in the year of 1993. In other words, their model of market organization is what as refer as monopolistic competition. As a result of the variations between the markets present, four distinct market structures are introduced: Pure Competition, Pure Monopoly, Monopolistic competition, and Oligopoly. Pure Competiton Pure Competition is a rarity as such as a theoretical market model. Pure competition involves a very large number of firms producing a standardized, non differentiated product that is exactly identical to that of other firms as perfectly competitive. Pure Competition is a market which firms will only make ‘normal’ profits, the amount required for them to stay in the ind ustry. In Pure Competition market there are no major barriers to entry into the industry so new firms can enter or exit the industry very easily. If a Pure Competition market reaches a situation which supply exceeds demand then the ruling market price is forced down and only the efficient firms survive.