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Pure Competition

Economists classify sellers' markets into four different structures or types. These are: (a) pure competition, (b) pure monopoly, (c) monopolistic competition, and (d) oligopoly. The structural criteria used to classify them are the number of sellers, the existence of product differentiation, and the ease of entry. A market's structure affects the behavior of firms, which in turn affects the market's economic performance. 

The term competition may be used in the sense of rivalry or in the sense of the pure competition market type. Pure competition describes a market in which there are so many firms selling a standardized product that each one acts as a price taker. Besides the conditions of many sellers and a standardized product, pure competition requires that no artificial restrictions be placed upon price or quantity and that easy entry and exit are available. Perfect competition requires all of the conditions of   pure competition plus complete knowledge or in formation and full mobility.

The pure competition model describes how the market sets equilibrium price and quantity and then how each typical firm adjusts its output to that market price.

The market-demand curve is negatively sloped, but since each firm believes that it is power less to affect the price, an individual firm's demand curve is infinitely elastic. A firm's total-revenue curve will therefore be a positive linear curve drawn out of the origin. Average revenue is the price per unit and so is just another name for the demand curve. Since a firm does not have to lower its price in order to sell more, its marginal-revenue curve is the same as its demand curve.

Since firms maximize their profit when they produce the level of output that equates their marginal cost and marginal revenue, a purely competitive firm's marginal-cost curve, above its aver age variable cost, is also its short-run supply curve A short-run market-supply curve is the sum of all the individual firm-supply curves in a market.

In the short run, firms in pure competition may experience an economic profit, an economic loss, or a normal profit- In the long run, economic profit invites entry, and economic loss causes firms to exit, so that in the long run all purely competitive firms earn just a normal profit.

A purely competitive market's long-run supply curve may reflect constant cost, increasing cost, or decreasing cost. In a constant-cost industry, long-run changes in the level of market output do not affect firms average total costs, so that price is not increased as a result of greater volume in the market. In an increasing-cost industry, long-run increases in the level of market output increase firms average total costs, so that price increases as a result of greater volume. In a decreasing-cost industry, long-run increases in the level of market output decrease firms average total costs, so that price decreases as a result of greater volume.

The pure competition model is an abstract idea, and not exactly representative of any real industry. However, it provides a norm or yardstick against which actual industries can be compared. Some industries approach this no-. Also the model involves important relationships that are relevant to other market types.

Pure competition is often held up as an ideal market situation. Its virtues may be divided into political arguments and economic arguments. Among the political arguments are: (a) that power is decentralized, (b) that the impersonal market  forces of supply and demand determine results, and (c) that it provides freedom of opportunity. Among the economic arguments are: (a) that each firm charges a price equal to its marginal cost, (b) that each firm earns only no-al profit in the long  run, (c) that each firm produces at the minimum point of its average-total-cost curve, (d) that no resources are wasted on unproductive advertising or promotion, and (e) that firms are pushed to quickly adopt new and better products and new and cost- saving technological processes.

Pure competition may not be all that it is cracked up to be. The failings of pure competition are: (a) that consumers are denied variety, (b) that  there is a lack of incentive for firms to carry on research and development, and (c) that average total cost may be high because of firms inability to take advantage of important economies of scale.