Difference Between Perfect And Perfect Competition

Assignment

QUESTION:

Explain what conditions are necessary for a market to be perfectly competitive. How does a firm operating in a perfectly competitive market set its price and output? What happens in such a market if firms are able to achieve high levels of profitability?

What is perfect competition?

Perfect competition refers to a market competition in which a very large number of buyers and sellers enjoy full freedom to buy and sell a homogenous good and service and they have perfect knowledge about the market conditions, and factors of production have full freedom of mobility. Although this kind of market condition is a rare phenomenon, it can be located in local vegetables and fruit markets. Another area which was often

PURE COMPETITION

Sometimes, a distinction is made between perfect and pure competition. The differences between two is the matter of degree. While ‘perfect competition’ has all the features mentioned above, under ‘ pure competition’ there is no perfect mobility of factors and perfect knowledge about market-conditions. That is, perfect competition less perfect mobility and perfect knowledge is pure competition ‘ pure competition’ is pure in the sense that it has absolutely no element of monopoly.

The perfect competition, is considered as a rare phenomenon in the real business world. The actual markets that approximate to the conditions of a perfectly competitive market includes markets for stocks and bonds, and agriculture market. Despite its limited scope, perfect competition model has been widely used in economic theories due to its analytical value.

How a Perfect competition market firms set its price and output –

A price taker can sell as much as it can produce at the existing market price.

So total revenue (TR) will be simply P × Q, where (P = price and Q = quantity sold). Marginal revenue (MR), the increase in total revenue for production of one additional unit, will always be equal to the market price for a price