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.