Perfect Competition (Essay Sample)

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Introduction
The modern day business environment has evolved from the traditional model that presented some firm with unique advantage over others and in effect offered bot h comparative and competitive advantage. Markets are gradually changing as the dynamics of operating are changing. There are different markets that firms operate in. This largely depends on the product that the firms are offering to the market as well as the environment under which the firm operates. Some of the different types of markets that forms operate in include monopoly, oligopoly, perfect competition, and monopolistic competition.
Irrespective of the market system that a firm operates in, it is necessary for the firm to ensure that it manages its controllable variable so that it can operate optimally. One of the variables that a firm should control is its input. To do this, the firm should be able to identify the equilibrium level to which it employs its output. This is a level of production where the firms’ inputs are used efficiently and where producing at a lesser than this level or at more of this level would result in inefficiencies (Fredrick, 2008). This paper critically discusses the perfect competition market system and market equilibrium. It also reviews four scholarly literature sources on the same. It also discusses the merits and demerits of the perfect competition markets system.
Perfect Competition
By definition, perfect competition is a market system where the competition in the market has reached its maximum possible level. There are several conditions that are thought to hold under this market system. These are;
The market operates under perfect knowledge. This means that there is a free flow of information in the market. Information is freely available to all market participants and no particular individual or a group of individual could possible harbor insider information.
There is freedom of entry and exit among the market players. This means that there are no restrictive barriers which exist in the market.
Al the sellers are price takers. This comes from the fact that there are numerous producers of the commodity and that no single supplier can therefore, determine the price at which he/she wishes to sell. The market forces of demand and supply rule.
Free markets allow for perfect competition and in effect, result in multiple firm offering almost homogeneous product. This causes perfect competition in the market where the customers are offered an unlimited choices and therefore, firms are compelled to sell at a price dictated by the market. Bruce alludes to the same claim by Maurice (2002), and adds that firms do not necessarily begin under the perfect competition kind of environment (Bruce, 2007).
Most economists concede that perfect competition is not available anywhere in this world. This is because it is virtually impossible to find a market where all the above mentioned conditions exist. This is because different firms have different processes and different standards which inevitably produce different products even though these products are focused at satisfying a similar need among the consumers. However some market conditions tend to exhibit near characteristics of a perfect competitive market system.
Perfect competition market Equilibrium
In the short run, firms could make supernormal profits more so after establishing a new market. However, in the long run, more market players start to move into the market and produce similar or close substitutes. This is triggered by other firms identifying the ones making the supernormal profits and moving into the market. This in effect, pushes the prices down and the firms start competing for the market share (Simpson, 2005). This is the main reason why in the perfect competitive market there are no barriers to entry and exit.
For the firms which are already operating in the market continue to reestablish themselves through processes such as operating at economies of scale. This is one of the factors that allow other firms to move into the market. When a firm cannot produce a commodity at a minimal unit cost, other firms that have not reached the equilibrium are attracted and are able to come into the market and establish their operations (Gobind & Ravinder, 2007). When such firms arrive, they increase the supply of a commodity and in effect, the demand goes down. What then happens is that the competing firms are forced to reduce their prices up to a point where all the firms cannot reduce it any further.
At this selling point, if there is a firm in the market which is not making profits from the prices that are provided by the market forces of demand and supply, then this firm automatically leaves the market (Gobind & Ravinder, 2007). This is because ideally there are not barriers for any firm that wants to exit. Consequently, the market share of the firm that has exited the market is shared by the remaining firms which in turn, adjust the prices upward to meet the marginal demand created by...