Let's imagine that there is a market for rye flour. Sellers (5 firms) and buyers interact on it. The rye flour market is structured in such a way that a new participant offering its products can easily enter it. In this market model there is perfect (pure) competition.

A distinctive feature of a pure competition market is that the buyer and seller cannot influence the price of the product. The price of a product is determined by the market.

In order for the same product to have the same price from different sellers in the same period of time, the following conditions must be met:

1. Market homogeneity;
2. Unlimited number of sellers and buyers of the product;
3. No monopoly (one influential manufacturer who has captured the lion's share of the market) and monopsony (the only buyer of the product);
4. Prices for goods are set by the market, and not by the state or interested parties;
5. Equal opportunities for conducting economic activities for all members of society;
6. Open information about the main economic indicators of all market players. It is about supply, demand and prices of a product. In a purely competitive market, all indicators are considered fairly;
7. Mobile factors of production;
8. The impossibility of a situation arising when one market subject influences others through non-economic methods.

If the above conditions are met, perfect competition is established in the market. Another thing is that in practice this does not happen. Let's look at why next.

Pure competition - abstraction or reality?

In real life, there is no such thing as perfect competition. Any market consists of living people who pursue their interests and have leverage over the process.

There are three main barriers that prevent a new company from simply entering the market:

Economic. Trademarks, brands, patents and licenses. Organizations that have been on the market for a long time necessarily patent their product. This is done so that new firms cannot simply copy the product and start successful trading;
Bureaucratic. With any number of approximately equal producers, a dominant firm always stands out. It is she who has power in the market and sets the price of the product;
Mergers and acquisitions. Large enterprises are buying up new, developing companies. This is done to introduce new technologies and expand the range of the enterprise under one brand. An effective way to compete with successful newcomers.

Economic and bureaucratic obstacles significantly increase the costs for newcomers to enter the market.

Company leaders ask themselves questions:

1. Will revenues from product sales cover the costs of promotion and development?
2. Will my business be profitable?

The purpose of entry barriers is to prevent new businesses from gaining a foothold in the market. Theoretically, any enterprise can become a new monopolist. Such cases have occurred in history. Another thing is that in percentage terms it will be 1-2% of 100% of new enterprises.

Markets close to pure competition

If pure competition is an abstraction, then why is it needed? An economic model is needed to study the laws of the market and more complex types of competition.

In economics, perfect competition plays a very important role:

1. Some markets experience almost perfect competition. This includes agriculture, securities and precious metals. Knowing the model of perfect competition, it is quite easy to predict the fate of a new company.
2. Pure competition is a simple economic model. It allows comparison with other types of competition.

Perfect competition, like other types of rivalry between economic entities, is an integral part of market relations.

Conditions of perfect competition

According to the most common definition, perfect competition is a market condition in which there are a large number of producers and buyers of a product in the market, and none of them can dictate the terms of purchase or sale of a particular product. It is assumed that both the buyer and the seller have complete information about the product, as well as about the prices for this product in other regions, in addition, the price for the product is fair, that is, it is set using the supply and demand function.

Currently, there are five main features of ideal competition: homogeneity of goods presented on the market, free pricing for all types of goods, the absence of entry and exit barriers for a particular industry, as well as the absence of restrictions on the number of market participants and pressure on producers and buyers goods and services.

It is obvious that such a state of affairs is practically impossible. Most goods that enter the market are subject to taxes, and some goods are subject to additional excise duties, which, for example, helps curb the growth of production and consumption of alcohol and tobacco.

Many product manufacturers choose to use both market and non-market methods to capture a larger share of the market. In some cases, a new company that seeks to capture a market offers quality products at low prices, in other cases it uses administrative resources to fight competitors or promote its products to the market.

One of the main problems that prevents the creation of conditions of perfect competition is the use of various advertising technologies, thanks to which consumers are presented with an “ideal” product, most of the negative properties of which are hushed up. In addition, many manufacturers of goods or services use various methods of industrial espionage, as well as copying the best examples of competitors' products and artificially increasing production costs.

Moreover, almost any manufacturer tries to occupy a monopoly position, which allows them to dictate prices and sales volumes in the market. To improve the conditions of competition, the state must take antimonopoly measures to create conditions close to perfect competition.

Perfectly competitive firm

A firm will make maximum profit when price is greater than average total cost. A firm is self-supporting if its price equals its total average cost. The firm minimizes losses when the price is less than the general average but greater than the variable average. The firm stops production when price is less than average total or average total and less than average variable cost. Losses in this case amount to fixed costs.

The line showing the quantity supplied by a firm at each price level is called the firm's supply curve.

A firm's supply curve is the portion of its marginal cost curve above average variable cost.

The supply curve of a perfectly competitive firm in the short run depends on the following factors:

Number of firms in the industry;
- size of firms;
- technology used.

In conditions of perfect competition, to ensure long-term equilibrium of the firm it is necessary:

1) the company should not have incentives to increase or decrease production;
2) the firm must be satisfied with the amount of capacity used and fixed costs that will provide it with minimum average total and long-term average total costs;
3) there should be no incentives for new firms to enter or exit the industry, i.e. the absence of economic profit, equality of average total and long-term average total in price is necessary.

The supply of a perfectly competitive industry in the short run is the total output of all firms. The short-run market supply curve of a perfectly competitive industry is the sum of the short-run supply curves of individual firms.

The position of an industry's long-run supply curve will depend on the extent to which a change in industry output will affect the prices of the factors of production used by the industry. Depending on the nature of this influence, industries with constant, increasing and decreasing costs are distinguished.

If the increased demand for products does not entail an increase in the price of resources, then a new long-term equilibrium for the industry will be established at price P and volume Q.

The industry supply curve is a horizontal line. This is a fixed cost industry. It is characterized by: prices remain unchanged when supply changes, price is equal to long-term average costs.

Rational distribution of resources is achieved when their distribution between sectors ensures the production of an optimal set of goods in quantity and structure. The most efficient allocation of resources is achieved when the marginal cost of production is equal to the market price, because the value of the last unit of production for the buyer will be equal to the value of the resources necessary for its production. Efficient use of resources is achieved when goods are produced at the lowest cost.

This means that the level of long-term average costs should be taken as indicators of the efficiency of the resources used, i.e. in perfectly competitive markets, firms always supply in accordance with the principle MC=P, and in long-term equilibrium P=LMC+LATC, i.e. A perfectly competitive market is efficient because the market forces acting on it ensure the distribution of resources and force firms to use them rationally.

Price of perfect competition

Perfect competition is a competitive market structure in which many relatively small, independent producers (sellers) offer a standard product that is purchased by many buyers.

Since the product is standard, the buyer does not care which seller he buys it from. Therefore, in such a market there is no basis for price competition.

The industry is open to entry and exit of any number of firms. Not a single company in the industry is taking any counteraction, nor are there any legal restrictions on this process.

Signs of a perfectly competitive market:

1) a large number of sellers and buyers of goods;
2) product homogeneity;
3) absolute mobility of resource movement, absence of barriers to entry into and exit from the industry;
4) no economic agent has power over prices;
5) participants are fully informed about prices and production conditions.

Dignity:

Helps allocate resources in such a way as to achieve maximum satisfaction of needs;
- forces firms to produce products at minimum average costs and sell them at a price corresponding to these costs.

Flaws:

Does not provide for the production of public goods (piece by piece);
- not always able to provide the concentration of resources necessary to accelerate scientific and technical progress;
- promotes unification and standardization of products (i.e. does not take into account the wide range of consumer choices).

If a firm operates under conditions of perfect competition, then it sells each unit of goods at the same market price. This means that each additional unit of goods sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the goods. Consequently, for an individual firm operating in a perfectly competitive market, the average and marginal revenues coincide and represent the same horizontal line drawn at the price level of the product. In conditions of perfect competition, the firm is so small compared to the market as an integral system that the decisions it makes have virtually no effect on the market price. The existing equilibrium between supply and demand under a single system will not change if an individual firm increases (decreases) the quantity of products produced. Since each seller has the opportunity to sell at the current price any volume of production he desires, he has no reason to reduce the price.

The fundamental problem of a perfectly competitive firm is to find the level of output that maximizes profits when demand for its output is perfectly elastic.

While identifying the main advantages of a perfectly competitive market model, one should also pay attention to its weaknesses.

In a competitive market system there are no motives for optimal distribution of income. In allocating resources, the competitive model does not allow for spillover costs and benefits or the production of public goods. A purely competitive industry may hinder the use of better production techniques and contribute to a slow pace of technological progress. A perfectly competitive system provides neither a wide range of product choices nor the conditions for developing new products.

In a perfectly competitive market there are many firms, each of which owns a small market share, and none of them can have a significant influence on the level of current prices. The market is characterized by homogeneity and interchangeability of competing goods, and the absence of price restrictions.

For a firm under these conditions, demand is completely price elastic. When expanding the volume of production (sales) of a product, the company, as a rule, does not change its price. The relationship between demand and price is inversely proportional. A decrease in price leads to an increase in demand. If the increase in supply in an industry increases, then the price will decrease in all firms, regardless of their production volumes. Thus, no firm in a perfectly competitive market plays a significant role in pricing.

The price is determined by supply and demand. The company focuses on the current price level. However, even under these conditions, a company, taking advantage of the market situation, can significantly increase the price, and then, gradually reducing it to the level of regular prices, achieve an increase in its income in a short period. There are a lot of markets of perfect (free, pure) competition, especially in the trade of consumer goods. Such markets also include international markets for agricultural products, goods and personal products.

Costs of perfect competition

The presence of a significant number of sellers and buyers in the market;
- an insignificant share of the volume of supply on the part of an individual seller, which does not allow him to influence the market price (in conditions of perfect competition, an individual firm acts as the recipient of the price);
- sale by all sellers of homogeneous, standard, unified products;
- the same information about the state of affairs on the market for all market participants (sellers and buyers);
- mobility of all resources, implying freedom of entry into and exit from the industry.

A market that meets all these conditions is called “perfect” or “free”. In such a market, sellers cannot influence the market situation and must adapt to it. The inability to influence price forces competing firms to maintain or improve their position in the market to reduce production costs, improve product quality, and use other non-price methods of competition.

Perfect competition was characteristic of the market economy of the mid-19th century. However, competition objectively leads to the concentration of production and capital in large enterprises and the emergence of monopolies that destroy competition.

In modern conditions, perfect competition is the exception rather than the rule. Today, the markets closest to perfect competition are the markets for agricultural products, securities, currencies, etc.

The behavior of a company in a competitive market is determined by the general rule of production optimization, maximizing profit. This rule is that through production, profit increases only if the income from the sale of an additional unit of product exceeds the cost of production of this unit, i.e. if marginal revenue (MR) is greater than marginal cost (MC).

On the contrary, when the costs associated with the release of one more unit of product are higher than the income generated through its sale (MR
Obviously, under these conditions, maximum profit will be achieved at the volume of production when marginal costs equal marginal revenue.

The firm will maximize profit by maintaining output at a level where marginal revenue equals marginal cost, provided that the price of the product exceeds average total cost.

MR = MC (P > ATC)

1. If at the optimal production volume Qmax, P=MC>ATC, then the firm will receive economic profit
2. With optimal production MC=P=ATC, the firm will receive zero economic profit, i.e. operates in self-sufficiency mode.
3. If P = MC 4. If P = MC 5. In the long run, the maximum profit is achieved by the firm; the firm receives normal profit and zero economic profit, which is associated with the stabilization of output in the industry.

This rule is true not only for conditions of perfect competition, but also for other types of markets.

The supply curve of a competitive firm focused on maximizing profits in the short-term time interval coincides with the ascending part of the marginal cost curve, which lies above the minimum point of average variable costs.

Each individual firm can either make an economic profit, incur losses, or operate at a breakeven level (earn normal accounting profit). The firm will compare marginal revenue with marginal cost and expand production until marginal revenue equals marginal cost. The quantity of products at which this equality is ensured is what the company will offer on the market.

The company may also encounter losses, for example, when the market price decreases. If for some reason the market price of a product has decreased and become below the minimum average gross cost, then the company will continue production in a volume that allows it to fully compensate for average variable costs and partially compensate for fixed costs, waiting for a more favorable environment. If the market price is below the level of variable costs, the firm will not be able to compensate for its costs and will be forced to stop production.

Perfect market competition

In economic theory, competition is divided into two types: perfect competition and imperfect competition. Imperfect competition in turn is divided into three types of market structures: monopoly, oligopoly and monopolistic competition. They differ in the number of firms entering the industry, in the nature of the products produced, in the degree of power over price, in the number of entry barriers to entry into the industry and the difficulty of overcoming them.

There are two extreme market situations: pure monopoly and its opposite - perfect competition. A pure monopoly is characterized by the presence of a single seller of goods that has no substitutes, a lack of product differentiation, practically insurmountable barriers to entry into the industry, and the ability to influence the price. In conditions of perfect competition, the industry has a large number of producers (sellers) of homogeneous goods, and there are no barriers to entry into the industry. A perfect competitor firm has no power over price; it is a “price taker.”

Both of the above situations do not take place in reality; these are so-called “theoretical abstractions”. However, they help to find and more accurately define the main differences between perfect and imperfect competition, and to understand the behavior of a company seeking to maximize profits in each of these situations.

A perfectly competitive market is characterized by:

A very large number of small producers or sellers of goods;
- standardized, homogeneous products;
- the inability of individual sellers to influence the price;
- unhindered entry and exit of the company from the industry;
- absence of the need to conduct non-price struggle;
- freedom of resource flow between industries;
- availability of complete information about the market to all participants in market relations.

Now it’s worthwhile to dwell in more detail on each of the above points:

1) The presence of a large number of firms in perfect competition implies that the share of each individual firm is very small compared to the total market size. Indeed, if the share of one firm is comparatively greater than the shares of others, then this firm will dominate the market. Consequently, this will lead to limited competition or even its elimination.
2) Products in a perfectly competitive market are standardized, or homogeneous. This means that the consumer does not care which seller’s product he purchases. It is the lack of product differentiation that is the main difference between a perfect competition market and a monopolistic competition market, where the buyer compares the quality of goods produced by different firms.
3) A perfect competitor firm produces such a small part of the total output in the industry that fluctuations in the level of its output do not affect the total supply, and, consequently, the price of the product. Thus, producers in a perfectly competitive market have no power over price: they have to sell the product at the price established in the market. That is why firms operating in conditions of perfect competition are called “price takers”. If a manufacturer increases the price by even a minimal amount, consumers will stop buying his product and will buy the same product (in terms of quality and other parameters) from his competitors at a lower price. Reducing prices is also economically irrational, since the company can sell all its products at the price established in the market.
4) In a perfectly competitive market there are no barriers to the entry of new firms or to the exit of existing firms. This condition ensures that no one firm can dominate the market and interfere with the activities of other firms. This condition also allows us to conclude that the number of firms in a perfectly competitive industry will remain large, despite possible small quantitative changes.
5) Conducting non-price struggle (using methods such as advertising, after-sales service, providing a guarantee for a product, etc.) is not necessary in conditions of perfect competition, since the company can already sell all its products at the market price, and bear additional expenses will only increase the company's costs without bringing any benefits and making the business unprofitable. It is worth noting, however, that the use of non-price control methods for the industry as a whole can be beneficial.
6) In conditions of perfect competition, each firm has access to any amount of resources it needs in production, and resources can freely “flow” from one production to another.
7) Buyers and sellers in conditions of perfect competition have complete information about market conditions. Buyers are aware of the prices charged for a given product by various sellers. Sellers, in turn, know about the prices set for this product by competitors. Because of this awareness, all sellers charge the same price for the product from all buyers.

Perfectly competitive products

Trade is carried out in a standardized product (for example, wheat, corn). This means that the product sold in the industry by different firms is so homogeneous that consumers have no reason to prefer the products of one company to the products of another manufacturer.

The inability for one firm to influence the market price, since there are many firms in the industry, and they produce standardized goods. In conditions of perfect competition, each individual seller is forced to agree to the price dictated by the market.

Lack of non-price competition, which is due to the homogeneous nature of the products sold.

Buyers are well informed about prices; if one of the manufacturers increases the price of their products, they will lose buyers.

Sellers are unable to collude on prices due to the large number of firms in a given market.

There is no free entry and exit from the industry, i.e., there are no entry barriers blocking entry into this market. In a perfectly competitive market, there is no difficulty in starting a new firm, nor is there any problem if an individual firm decides to leave the industry (since firms are small in size, there will always be an opportunity to sell the business).

For your information. In practice, no existing market is likely to meet all the criteria for perfect competition listed here. Even markets that are very similar to Perfect Competition can only partially satisfy these requirements. In other words, perfect competition refers to ideal market structures that are extremely rare in reality. Nevertheless, it makes sense to study the theoretical concept of perfect competition for the following reasons. This concept allows us to judge the principles of functioning of small firms existing in conditions close to perfect competition. This concept, based on generalizations and simplification of analysis, allows us to understand the logic of firm behavior.

The main feature of a perfect competition market is the lack of control over prices on the part of the individual manufacturer, i.e., each firm is forced to focus on the price set as a result of the interaction of market demand and market supply. This means that the output of each firm is so small compared to the output of the entire industry that changes in the quantity sold by an individual firm do not affect the price of the product. In other words, a competitive firm will sell its product at the price already existing in the market.

Perfect and imperfect competition

The specialized literature identifies the following functions performed by competition:

Establishment or identification of any goods;
equalization of cost with distribution of profit received depending on labor costs for production;
regulation of the distribution of financial resources between industries and industries.

There are different classifications of this economic indicator. For example, perfect and imperfect competition. In this article we will dwell in more detail on some types.

Within this classification, it is necessary to distinguish the following types:

Individual, in which one participant seeks to occupy a certain place in the market to select the best conditions for the purchase and sale of services and goods;
local, defined among sellers in the same territory;
sectoral (within one industry there is a struggle to obtain maximum income);
interindustry, expressed in the competition between sellers of various industries on the market for additional attraction of buyers in order to receive large income;
national, represented by competition between commodity owners within one state;
global, defined as the struggle of business entities and different countries within the world market.

Types of competition in terms of the nature of development

Based on the nature of development, this economic indicator is divided into regulated and free. Also in the economic literature you can find the following types of competition: price and non-price.

Thus, price competition can arise by artificially reducing prices for specific products. At the same time, price discrimination is quite widely used, which occurs when the specified product is sold at different prices that are not justified in terms of costs.

This type of competition is most often used in the transportation of goods or products (often this is the transportation of non-durable goods from one retail outlet to another), as well as in the service sector.

Non-price competition manifests itself mainly due to the improvement of product quality, production technologies, nanotechnology and innovation, as well as patenting of sales conditions. This type of competition is based on the desire to capture part of the market of a certain industry through the release of completely new products that are fundamentally different from analogues or by modernizing the previous model.

Characteristics of perfect and imperfect competition

This classification takes place depending on the competitive equilibrium in the market. Thus, perfect competition is based on the fulfillment of any equilibrium prerequisites. These may include: many independent consumers and producers, free trade in production factors, independence of business entities, comparability and homogeneity of finished products, as well as the availability of accessible information on the state of the market.

Imperfect competition is based on the violation of any prerequisites for equilibrium. This competition is characterized by the following properties: distribution of the market between large enterprises with limitation of their independence, differentiation of finished products and control of market segments.

Advantages and disadvantages of competition

Perfect and imperfect competition have their own advantages and disadvantages.

So, based on the definition of perfect competition, which shows the state of the market where there are producers and consumers who do not influence the market price, which means there is no reduction in demand for products with an increase in sales volumes, the advantages include:

Contributing to achieving alignment of interests of market participants by using balanced supply and demand, achieving equilibrium prices and volumes;
ensuring efficient allocation of limited resources in accordance with price information;
orientation of the manufacturer towards the buyer - towards achieving the main goal to satisfy some of the economic needs of the citizen.

Thus, perfect and imperfect competition contribute to the achievement of an optimal and competitive state of the market, in which there is no profit or loss.

Despite the listed advantages, there are also some disadvantages of these types of competition:

The presence of equality of opportunity while maintaining inequality of results;
goods that are not subject to division and piecemeal valuation in a competitive environment are not produced;
lack of consideration of different consumer tastes.

Perfect and imperfect competition provide insight into how the market mechanism works, but are actually quite rare. The second type of competition determines the influence of producers and consumers on price and its changes. At the same time, the volume of finished products and the access of manufacturers to this market has some restrictions.

There are the following conditions in which some types of competition (perfect and imperfect) have:

There should only be a limited number of producers operating in a functioning market;
there are economic conditions in the form of barriers, natural monopolies, taxes and licenses for penetration into a particular production;
The market of perfect and imperfect competition in information is characterized by some distortions and is biased.

These factors can contribute to the disruption of any market equilibrium due to the limited number of producers, which sets and subsequently maintains fairly high prices in order to obtain high monopolistic profits. In practice, you can find the following types of competition (including perfect and imperfect): oligopoly, monopoly and monopolistic competition.

Classification of competition according to supply and demand of goods or services

Within the framework of this classification, perfect and imperfect market competition take the following types: oligopolistic, pure and monopolistic.

Considering the above in more detail, it can be noted that oligopolistic competition can mainly be of an imperfect type. The key characteristics of a functioning market are: a small number of competitors that have a fairly strong relationship; significant market power (the so-called reactive position and measured by the elasticity of the enterprise's response to some behavior of competitors); limited number with similarity of goods.

Conditions of perfect and imperfect competition appear for such industries as: the chemical industry (production of rubber, polyethylene, industrial oils and certain types of resins), mechanical engineering and metalworking industries.

Pure competition is a type that can be classified as perfect competition. The key characteristics of this market include the following: a significant number of both sellers and buyers without sufficient power to influence prices; undifferentiated (fungible) goods sold at prices that are determined by comparing supply and demand, as well as the absence of unique market power.

Market structures (perfect and imperfect competition) are widely used in industries producing consumer goods: food and light industries, as well as the manufacture of household appliances.

There is another type of competition – monopolistic. Its main characteristics include: a large number of competitors with a balance of their forces; differentiation of goods, expressed by the buyer's consideration of goods from the point of view of their possession of distinctive features perceived by the market.

Types of market competition (perfect and imperfect) through differentiation convey the following forms: a special technical characteristic, the taste of a drink, a combination of various characteristics. We must not forget about the increase in market power due to the differentiation of goods, which will protect the business entity and make a profit above the market average.

Market classification

The model of perfect and imperfect competition assumes the existence of competitive and non-competitive markets.

As criteria for distinguishing these markets, it is customary to consider the main features that are characteristic to some extent of the models:

The number of enterprises in a particular industry with their sizes;
production of goods: of the same type (standardized) or heterogeneous (differentiated);
ease of entry into a specific industry or exit of an enterprise from it;
availability of market information to companies.

A market of perfect and imperfect competition has the following features:

The presence of a certain number of buyers and sellers for a specific type of product, while each of them can produce (buy) only a small share of the total market volume;
homogeneity of the product from the perspective of buyers;
the absence of entry barriers for a newly formed manufacturer to enter the industry, as well as free exit from it;
availability of complete information for all market participants (for example, buyers are aware of prices);
rationality in the behavior of market participants who pursue personal interests.

Firm under conditions of perfect and imperfect competition

The behavior of an enterprise depends not so much on time as on the type of competition. Considering the rational behavior of a company in conditions of perfect competition, it is necessary to note the following. The goal of any business entity is to maximize profits obtained by increasing the gap between price and costs. In this case, the price must be set under the influence of supply and demand in the market. If an enterprise significantly increases the price of its own finished products, it may lose customers purchasing similar goods from a competitor. And the sales of the specified business entity may decrease significantly. As for costs, in this case their value is determined by the technologies used by the enterprise.

Thus, any business entity is faced with the question of determining the quantity of products produced and sold in order to obtain maximum profit. Therefore, the company has to constantly compare the market price of the product and the marginal cost of its production.

Enterprise in conditions of imperfect competition

To achieve rational behavior of an enterprise in the presence of imperfect competition in the market, the following conditions must be met.

Unlike the example considered above, in conditions of imperfect competition the manufacturer can already influence the price of its own products. If, under conditions of perfect competition in a market, income from product sales does not contain any changes (equated to the market price), then in the presence of imperfect competition, sales growth can reduce the price, which leads to a decrease in additional income.

In addition to profit maximization, there are other types of motivation for an enterprise:

At the same time, consider increasing sales volume;
the enterprise achieves a specific level of profit, and then there is no need to make any efforts to maximize it.

Summarizing the material presented in this article, it is necessary to note the following. The development of competition between producers leads to the emergence of large, stable companies, with which it is already difficult for other producers to “compete”. Each newly created manufacturer that wants to occupy a certain place in a specific industry or market may face quite complex barriers. In this case, we are talking about the availability of the necessary financial resources. There are also some administrative barriers that provide for fairly stringent requirements for “newcomers” to the market.

Features of perfect competition

In order for competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the minds of buyers are homogeneous and indistinguishable, i.e. products from different companies are completely interchangeable (they are complete substitute goods).

Under these conditions, no buyer would be willing to pay a higher price to a hypothetical firm than he would pay to its competitors. After all, the goods are the same, buyers do not care which company they buy them from, and they, of course, choose the cheapest ones. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why a buyer can choose one seller over another.

Further, with perfect competition, neither sellers nor buyers influence the market situation due to the smallness and number of all market participants. Sometimes both of these sides of perfect competition are combined when talking about the atomistic structure of the market. This means that there are a large number of small sellers and buyers in the market, just as any drop of water is made up of a gigantic number of tiny atoms.

And just as the Brownian motion of an individual atom does not affect the shape of a drop of water, the actions of an individual firm under conditions of perfect competition do not affect the market situation in the industry. The volume of consumer purchases (or sales by the seller) is so small compared to the total market volume that a decision to reduce or increase this volume creates neither a surplus nor a shortage. The total size of supply and demand simply “does not notice” such small changes.

All of the above restrictions (homogeneity of products, large numbers and small size of the company) actually predetermine that with perfect competition, entities are not able to influence prices. Therefore, it is often said that under perfect competition, each individual selling firm “gets the price,” or is a price-taker.

Indeed, it is difficult to imagine that one potato seller on the “collective farm” market will be able to impose a higher price on his product to buyers if other conditions of perfect competition are met. Namely, if there are many sellers, and their potatoes are exactly the same.

Therefore, it is often said that under perfect competition, each individual selling firm “receives the price” prevailing in the market.

Barriers to entry into the market are any competitive advantages of firms already operating in the industry compared to those trying to get there. The most typical barriers to entry are the large initial capital required to start a business, the uniqueness of the product or technology used, and legal restrictions. Market exit barriers are losses that are inevitable when trying to withdraw a business from a given industry and move it to another. Most often, the exit barrier is high sunk costs, i.e. the need to sell the company's assets that have become unnecessary for next to nothing.

The condition for perfect competition is the absence of barriers to entry and exit from the market. The fact is that when such barriers exist, sellers (or buyers) begin to behave as a single corporation, even if there are many of them and they are all small firms.

Most typical of perfect competition, the absence of barriers, or freedom to enter the market (industry) and leave it, means that resources are completely mobile and move without problems from one production to another. There are no difficulties with the cessation of operations on the market. Conditions do not force anyone to remain in the industry if it is not in their best interests. In other words, the absence of barriers means absolute flexibility and adaptability of a perfectly competitive market. All this is very attractive to many entrepreneurs, despite the fact that many of them cannot survive with such great competition.

The last condition for the existence of a perfectly competitive market is that all the information a manager needs to make a decision (about prices, technology, probable profits, etc.) is freely available to everyone. Firms have the ability to quickly and efficiently respond to changing market conditions by moving the resources they use. There are no trade secrets of unpredictable developments or unexpected actions of competitors. That is, the company makes decisions in conditions of complete certainty regarding the market situation or, which is the same, in the presence of perfect information about the market.

Neither firm views its competitors as a threat to its market share of sales and, therefore, is not interested in its competitors' production decisions. Information about prices, technology and likely profits is available to any firm, and it is possible to quickly respond to changing market conditions by moving the production resources used, i.e. selling some factors of production and investing the proceeds in others.

Violation of any of these requirements leads to the undermining of perfect competition and the emergence of imperfect competition.

Markets that fully satisfy the conditions of perfect competition do not exist in reality, and only some of the markets come close to it (for example, the market for grain, securities, foreign currencies, the stock exchange, the market for agricultural products (wheat, sugar, flour), as well as some segments of food products general consumption (baked goods, many types of medicines, etc.).

Signs of perfect competition

Under these conditions, there is no possibility of using non-price competition methods; each enterprise cannot control prices on the market; entering the industry or, if necessary, leaving it is not difficult.

If this type of competition (pure) prevails in the industry, then we have the opportunity to talk about a competitive market; in other situations, there is imperfect competition in the market.

First of all, let us define in detail the signs of pure competition:

The first thing that catches your eye is the large number of manufacturers and sellers with small volumes of products produced by each.
Secondly, all products are homogeneous and standardized, so it is practically very difficult to use methods of non-price competition (quality, advertising).
Third, the individual manufacturer cannot control the price. This is due to the fact that each manufacturer produces a small quantity of a product, there are many sellers of this product, so a change in price by one manufacturer cannot actually affect the market price.

In this regard, each manufacturer simply agrees with the market price established in a given period and only adapts to it so as not to incur losses.

And finally, fourthly, there are no serious obstacles to the entry of new manufacturers into the industry. As a rule, production in such industries is not associated with complex technological processes that require special expensive equipment and highly qualified labor, so there are no special financial difficulties and large capital is not required to enter this industry.

Pure competition is quite rare in practice; only agricultural production can serve as an example, but analysis of such competition is necessary because:

1) there are industries that are as close as possible to pure competition;
2) pure competition is the simplest situation, knowledge of which is necessary to understand the behavior of the manufacturer, the mechanisms for determining production volumes and effective prices. In short, this is the starting point of any kind of competitive behavior;
3) the mechanism of pure competition plays the role of a standard by which the real market situation is assessed, since this is an ideal market model.

Perfect competition model

Let's take a closer look at these characteristics:

1. The presence in the market of a significant number of sellers and buyers of this good. This means that not a single seller or buyer in such a market is able to influence the market equilibrium, which indicates that none of them has market power. Market subjects here are completely subordinated to the market elements.
2. Trade is carried out in a standardized product (for example, wheat, corn). This means that the product sold in the industry by different firms is so homogeneous that consumers have no reason to prefer the products of one company to the products of another manufacturer.
3. The inability of one firm to influence the market price, since there are many firms in the industry, and they produce standardized goods. In perfect competition, each individual seller is forced to accept the price dictated by the market.
4. Lack of non-price competition, which is due to the homogeneous nature of the products sold.
5. Buyers are well informed about prices; if one of the manufacturers increases the price of their products, they will lose buyers.
6. Sellers are not able to collude on prices, which is due to the large number of firms in this market.
7. Free entry and exit from the industry, i.e., there are no entry barriers blocking entry into this market. In a perfectly competitive market, there is no difficulty in starting a new firm, nor is there any problem if an individual firm decides to leave the industry (since firms are small in size, there will always be an opportunity to sell the business).

As an example of markets of perfect competition, markets for certain types of agricultural products can be mentioned.

For your information. In practice, no existing market is likely to meet all the criteria for perfect competition listed here. Even markets that closely resemble perfect competition can only partially satisfy these requirements. In other words, perfect competition refers to ideal market structures that are extremely rare in reality. However, it makes sense to study the theoretical concept of perfect competition for the following reasons. This concept allows us to judge the principles of functioning of small firms existing in conditions close to perfect competition. This concept, based on generalizations and simplification of analysis, allows us to understand the logic of firm behavior.

Examples of perfect competition (with some reservations, of course) can be found in Russian practice. Small market traders, tailor shops, photo studios, car repair shops, construction crews, apartment renovation specialists, farmers at food markets, and kiosk retail trade can be regarded as the smallest firms. All of them are united by the approximate similarity of the products offered, the insignificant scale of the business in terms of market size, the large number of competitors, the need to accept the prevailing price, i.e., many conditions of perfect competition. In the sphere of small business in Russia, a situation very close to perfect competition is reproduced quite often.

The main feature of a perfect competition market is the lack of control over prices on the part of the individual producer, i.e., each firm is forced to focus on the price set as a result of the interaction of market demand and market supply. This means that the output of each firm is so small compared to the output of the entire industry that changes in the quantity sold by an individual firm do not affect the price of the product. In other words, a competitive firm will sell its product at the price already existing in the market.

Perfectly competitive industries

Operating in a market where the level of competition in various industries largely depends on the legislation of the country, the company faces a large number of competitors that in one way or another affect its activities and profit. Therefore, in the process of strategic and tactical planning, it is extremely important to conduct a comprehensive competition analysis, which involves studying the work of competing companies and the competitiveness of the goods sold.

Competition, analysis, strategy and practice

In fact, competition, analysis, strategy and market research practices accompany the marketing activities of every firm. When drawing up a marketing program, specialists determine whether the industries under study operate under conditions of perfect or imperfect competition, and whether they contain signs of an absolute monopoly.

Most often, competition in an industry is imperfect in one of the following types:

Pure monopoly;
monopolistic competition;
Oligopoly.

Competition in business - meaning and consequences

In general, effective competition in modern business implies the dynamic sale of exactly the product that customers need at a given time and for which they are willing to pay. Active competition in business and its consequences are quite positive for consumers - the range and quality of services and goods is growing, and prices are falling. For the firms themselves, intense competition in small businesses is an incentive to enter new markets and introduce innovations. Thus, manufacturing industries under conditions of monopoly, imperfect or perfect competition are forced to monitor the competitive environment as the most striking distinctive feature of business.

Competition in business terms

Drawing up each business plan requires a section on competitors.

Competition in business terms is analyzed:

By grouping competitors by the competitive positions they use (to better understand their motivations);
through presenting the market in the form of a rating of companies, starting with those using the most aggressive methods of fighting “for the buyer’s money.”

During the analysis process, in each business plan, competition is considered from the point of view of the uniqueness, strengths and weaknesses of the product/service. It is also taken into account that competition in large and small businesses is conducted using completely different methods.

Levels of competition and their assessment

Marketing analysis of competition using the example of any company begins with compiling a list of competitors. It is important for analysts to identify major and minor companies, their advantages and disadvantages. Also, competition analysis should be performed using the example of a market niche occupied by competitors, examining methods for selling competitive products, their main consumers and customers.

Grouping for the analysis of organizational data is helped by levels of competition when all firms are included in the list of competitors:

Offering similar products;
offering similar products in the same price range;
solving the same consumer problem with their product;
selling products for similar purposes.

From a legal point of view, analysis of competition in the market and the competitiveness of any product is carried out by assessing whether the product meets GOSTs, specifications and other standards of the country to which it is supplied. Advertising analysis of information competition in the market includes assessing the image of the product, the “promotion” of the brand and the reputation of the company. They also analyze ways to inform consumers - text on packaging, data sheet information, etc.

Economic and commercial level of competition in the market

For the product under study, the level of quality, its cost and operating costs are determined. Also, by performing an analysis of technological competition, they find out the amount of production costs, required investments, technical features of production and its organization. They analyze the level of competition in the market depending on the level of supply and demand, geographical nuances of the market, the social significance of the product, the degree of reliability of delivery and the payment system. Examples of competition levels in developed dealer and service networks are also taken into account.

Analysis of the level of competition

When performing a qualitative analysis of the level of competition between firms, as a rule, they consider the identity of their sizes and the technologies and resources used. In addition, the level of market competition depends on the number of firms competing with each other and the barriers to firms leaving a given market.

Examples of levels of competition

By looking at examples of levels of competition for various products, marketers assess whether the manufacturing company has the ability to make its products more attractive compared to competitors. After all, competition in the manufacturing industry is a desire for sustainable growth and consumer recognition.

Porter's Competition Analysis Model

Assessing a firm's industry position from a strategic perspective allows us to perform Porter's competitive analysis model, which includes five levels:

Assessing the threats of the emergence of new participating firms;
assessing the market power of consumers;
assessing the market power of supplier firms;
analysis of the level of intra-industry competition;
assessing the danger of the emergence of substitute products.

Porter's current 5-factor model of strategic competitive analysis ensures the long-term profitability of manufactured products. Thanks to it, the company competes in the chosen industry for a long period of time while maintaining high profitability and maintaining competitiveness.

Porter's competition analysis: factors influencing entry barriers

Porter's competition analysis begins with identifying barriers to entry into an industry. It has been proven that by saving on scale, that is, increasing production volumes, the company minimizes production costs per unit of production. This prevents newcomers from achieving high profitability when entering the market. Also, the analysis of industry competition according to Michael Porter involves assessing how difficult it is for new players to occupy a niche in which there is already a fairly wide range.

No less important factors influencing the level of competition in the industry are the size of the start-up capital and fixed costs required to enter production and occupy the corresponding market niche. Moreover, the high level of distribution competition in any industry prevents new players from reaching the target audience easily and quickly and makes the entire industry unattractive.

Industry competition analysis: political and additional threats

When analyzing competition in the industry, it is important not to forget that the growth of government restrictions, the introduction of additional quality standards and regulations for goods reduces the attractiveness of the entire industry for new competitors.

Also, a detailed analysis of the level of competition in the industry under study includes solving a number of additional problems:

Are existing competitors ready to lower prices in order to maintain the market niche they occupy?
Do competitors have additional reserve sources of financing and means of production to actively compete?
How do competitors' chosen strategies and practices match their analysis of competition in the industry?
Do competitors have the opportunity to intensify their advertising confrontation or quickly establish other distribution channels?
How likely is it that the industry will slow down or stop growing?

Profit under perfect competition

Profit is the difference between gross (total) income (TR) and total (gross, total) production costs (TC) for the sales period:

Profit = TR - TS.

Gross revenue is the price (P) of goods sold multiplied by sales volume (Q).

Since the price is not influenced by a competitive firm, it can only influence its income by changing sales volume. If a firm's gross revenue is greater than total costs, then it makes a profit. If total costs exceed gross income, the firm incurs losses.

Total costs are the costs of all factors of production used by a firm to produce a given volume of output.

Maximum profit is achieved in two cases:

A) when gross income (TR) exceeds total costs (TC) to the greatest extent;
b) when marginal revenue (MR) equals marginal cost (MC).

Marginal revenue (MR) is the change in gross revenue obtained by selling an additional unit of output.

For a competitive firm, marginal revenue is always equal to the price of the product:

Marginal profit maximization is the difference between marginal revenue from selling an additional unit of output and marginal cost:

Marginal profit = MR - MC. Marginal costs are additional costs that lead to an increase in output by one unit of a good. Marginal costs are entirely variable costs because fixed costs do not change with output.

For a competitive firm, marginal cost is equal to the market price of the product:

The limiting condition for maximizing profit is the volume of output at which price equals marginal cost.

Characteristics of perfect competition

Perfect competition is very rare in practice, but a set of concepts associated with it are often used in theoretical economics when constructing economic models and forecasting the development of economic processes.

In conditions of perfect competition, there are no such negative processes as: overproduction of goods, inflation, unemployment, market monopolization, since in perfect competition ideal economic conditions arise.

General characteristics of perfect competition:

1. An infinitely large number of firms competing with each other operate on the market, while none of the entities (be it a manufacturer, seller or buyer), due to their large number, can influence prices and therefore are forced to adapt to already established price levels. The demand for the products of a perfect competitor is absolutely elastic, that is, it always exists and is constantly satisfied.
2. Equality and anonymity of enterprises operating in the market. - since with perfect competition absolutely identical products are produced, advertising, the prestige of brands, individual characteristics and quality of products do not matter. The products of company A are no different from the products of companies B C and D.
3. Absolute mobility of material, labor and financial resources - since there are no economic, financial, technological or other obstacles.
4. Independence of any company in decision making.
5. Free entry and exit from the market for any company - there are no obstacles to this.
6. Full awareness of any company about all market parameters - about prices, costs, demand, production volumes, product properties and others on the market and among competitors.

Perfect competition examples

Examples of a perfectly competitive market are not very common. In reality, very often there are cases when only the will of the seller decides how much a particular product will cost. But with an increase in the number of market players who sell identical goods, unreasonable overestimation is no longer possible. The price is less dependent on one specific merchant or a small group of sellers. With a serious increase in competition, on the contrary, buyers determine the cost of the product.

Examples of a perfectly competitive market

In the mid-1980s, agricultural prices fell sharply in the United States. Dissatisfied farmers began to blame the authorities for this. In their opinion, the state has found a tool to influence agricultural prices. It dropped them artificially in order to save on mandatory purchases. The drop was 15 percent.

Many farmers personally went to the largest commodity exchange in Chicago to make sure they were right. But they saw there that the trading platform unites a huge number of sellers and buyers of agricultural products. No one is able to artificially lower the price of any product, since there are a huge number of participants in this market on both sides. This explains that in such conditions unfair competition is simply impossible.

Farmers personally saw at the stock exchange that everything is dictated by the market. Prices for goods are set regardless of the will of one particular person or state. The balance of buyers and sellers determined the final price.

This example illustrates this concept. Complaining about fate, US farmers began to try to get out of the crisis and no longer blamed the government.

The characteristics of perfect competition include the following:

The price of a product is the same for all buyers and sellers in the market.
Product identity.
All market players have full knowledge of the product.
A huge number of buyers and sellers.
None of the market participants individually influences pricing.
The manufacturer has the freedom to enter any area of ​​production.

All of these features of perfect competition, as presented, are very rarely present in any industry. There are few examples, but they exist. These include the grain market. Demand for agricultural goods always regulates pricing in this industry, since it is here that all of the above signs can be seen in one area of ​​production.

Advantages of perfect competition

The main thing is that in conditions of limited resources, distribution is more equitable, since the demand for goods determines the price. But the increase in supply does not allow it to be particularly overestimated.

Disadvantages of Perfect Competition

Perfect competition has a number of disadvantages. Therefore, you cannot completely strive for it.

These include:

The model of perfect competition slows down scientific and technological progress. This is often due to the fact that the sale of goods, when supply is high, is sold slightly above cost with minimal profit. Large investment reserves are not accumulated, which could be used to create more advanced production.
Products are standardized. No uniqueness. No one stands out for their sophistication. This creates a kind of utopian idea of ​​equality, which consumers do not always accept. People have different tastes and needs. And they need to be satisfied.
Production does not calculate the maintenance of the non-productive sector: teachers, doctors, army, police. If the entire economy of the country had a complete, perfect form, humanity would forget about such concepts as art and science, since there would simply be no one to feed these people. They would be forced to go into the manufacturing sector for a minimum source of income.

Examples of a perfectly competitive market showed consumers the homogeneity of products and the lack of opportunity to develop and improve.

Marginal revenue

Perfect competition has a negative impact on the expansion of business enterprises. This is related to the concept of “marginal revenue”, due to which firms do not dare to build new production facilities, increase acreage, etc. Let’s take a closer look at the reasons.

Let's say one agricultural producer sells milk and decides to increase production. At the moment, the net profit from one liter of product is, for example, 1 dollar. Having spent funds on expanding feed supplies and building new complexes, the enterprise increased production by 20 percent. But his competitors also did this, also hoping for stable profits. As a result, twice as much milk entered the market, which reduced the cost of finished products by 50 percent. This led to production becoming unprofitable. And the more livestock a producer has, the more losses he incurs. The perfectly competitive industry goes into recession. This is a vivid example of marginal revenue, beyond which the price will not rise, and an increase in the supply of goods to the market will only bring losses, not profits.

The antipode of perfect competition

It is unfair competition. It occurs when there are a limited number of sellers on the market, and the demand for their products is constant. In such conditions, it is much easier for enterprises to reach an agreement among themselves, dictating their prices on the market. Unfair competition is not always a conspiracy or a scam. Very often, associations of entrepreneurs occur in order to develop common rules of the game, quotas for manufactured products for the purpose of competent and effective growth and development. Such firms know and calculate profits in advance, and their production is deprived of marginal revenue, since none of the competitors suddenly throws a huge volume of products onto the market. Its highest form is a monopoly, when several large players unite. They are losing competition. In the absence of other producers of identical goods, monopolies can set inflated, unreasonable prices, receiving excess profits.

Officially, many states fight such associations by creating antimonopoly services. But in practice their struggle does not bring much success.

Unfair competition occurs under the following conditions:

A new, unknown area of ​​production. Progress does not stand still. New science and technology appear. Not everyone has huge financial resources to develop technology. Often, several leading companies create more advanced products and have a monopoly on their sales, thereby artificially inflating the price of a given product.
Productions that depend on powerful associations into a single large network. For example, the energy sector, the railway network.

But this is not always detrimental to society. The advantages of such a system include the opposite disadvantages of perfect competition:

Huge windfalls allow you to invest in modernization, development, and scientific and technological progress.
Often such enterprises expand the production of goods, creating a competition for customers between their products.
The need to protect one's position. Creation of the army, police, public sector workers, since many free hands are freed up. There is a development of culture, sports, architecture, etc.

To summarize, we can conclude that there is no system that is ideal for a particular economy. Every perfect competition has a number of disadvantages that slow down society. But the arbitrariness of monopolies and unfair competition only leads to slavery and a miserable existence. There is only one result - you need to find a middle ground. And then the economic model will be fair.

Types of perfect competition

Perfect competition (oligopoly) is a market condition in which there are many producers and consumers who do not influence the market price. This means that demand for products does not decrease as sales increase.

The main advantages of perfect competition:

1) Allows you to achieve alignment of economic interests of producers and consumers through balanced supply and demand, through achieving equilibrium price and equilibrium volume;
2) Ensures efficient allocation of limited resources thanks to information included in the price;
3) Orients the manufacturer towards the consumer, that is, towards achieving the main goal, satisfying various economic needs of a person.

Thus, with such competition, an optimal, competitive state of the market is achieved, in which there is no profit and no loss.

Disadvantages of perfect competition:

1) there is equality of opportunity, but at the same time inequality of results remains;
2) goods that cannot be divided and valued individually are not produced under conditions of perfect competition;
3) different tastes of consumers are not taken into account.

Perfect market competition is the simplest market situation that allows us to understand how the market mechanism really functions, but in reality it is rare.

Imperfect competition is competition in which producers (consumers) influence and change the price. At the same time, the volume of products and access of manufacturers to this market is limited.

Basic conditions of imperfect competition:

1) There is a limited number of manufacturers on the market;
2) There are economic conditions (barriers, natural monopolies, state taxes, licenses) for penetration into this production;
3) Market information is distorted and not objective.

All these factors contribute to market imbalance, as a limited number of producers set and maintain high prices to obtain monopoly profits.

There are 3 types:

1) monopoly,
2) oligopoly,
3) monopolistic competition.

Principles of perfect competition

First, let's define the rule of buyer behavior. Since buyers, represented by an infinite number of firms, have unlimited choices, with the slightest change in the supply price (deviation relative to the market price) of a given firm, the volume of demand for its products will either decrease to zero or increase to infinity. This means that buyer behavior is characterized by perfectly elastic demand for the products of each individual company. Their behavior is expressed by the demand curve as a horizontal straight line (D).

Now let's turn to the company. The question arises: what quantity of goods will she offer for sale under these conditions? The demand curve is nothing more than the consumer spending curve. The constancy of the price of a unit of goods means that each additional unit of output provides the company with a constant additional income. Consequently, for any volume of production, the firm’s marginal revenue curve has the form of a horizontal straight line, coinciding with the demand curve: MR = D. At the same time, this means that a competitive firm, for any volume of production, can receive the same income per unit of product. This income is average (AR). Therefore, the equality holds: D = MR = AR. In other words, the demand, marginal revenue, and average revenue curves are the same.

From the analysis of production principles it is known that with increasing output, marginal costs increase; the MC curve has a positive slope and coincides with the supply curve, therefore MC = S. It is also known that the firm sets the optimal volume of production according to the rule of equality of marginal revenue and marginal costs: MR = MC. Finally, recall that the relationship between marginal and average values ​​is such that the marginal cost curve intersects the average cost curve (A C) at the minimum point of the latter. Consequently, the volume of supply of the firm corresponds to the point (A) of the intersection of the MR, MC and AC curves.

Point A corresponds to the supply volume Qo and price Po; the firm will offer this quantity of goods for sale at a given price. At the same time, point A lies on the demand curve D. Projections from this point onto the volume scale and price scale indicate that buyers are willing to buy a given quantity of goods (Qo) at price P0. Thus, the price Po ensures equality of demand for the products of a given company and its supply.

There is no reason why a firm would sell at a lower price and buyers would buy a product at a higher price; this price is optimal for them. The company cannot sell this quantity of goods at price P1>P0, since the demand for its products will decrease to zero. At the same time, it cannot sell this volume of production at price P2
So, the firm's equilibrium is achieved when the demand curve touches the average cost curve at the point of intersection of the latter and the marginal cost line. This means that there is a triple equality: market price = marginal costs = average costs (P = MC = AC). The firm earns zero net profit, enough to have an incentive to stay in the industry (Since all competitive firms have the same (equal to the market price) marginal cost and marginal revenue corresponding to the minimum total average cost, in perfect competition no one has an incentive to enter into or out of the industry).

Having examined the relationship between buyers and a typical competitive firm, we can believe that these relationships are of a typical nature for a competitive market and are a general rule.

Thus, perfect competition is characterized by the following principles:

The rule of perfectly elastic demand for the products of each individual firm;
the rule of (exclusively) price competition between market participants;
rule for maximizing profit by a company: P = MR = MC.

Perfect competition in the long run

The long-term period differs from the short-term period in that, firstly, the manufacturer can increase production capacity (so all costs become variable) and, secondly, the number of firms in the market can change. In conditions of perfect competition, entry and exit of new firms into the market is absolutely free. Therefore, in the long term, the level of profit becomes a regulator of attracting new capital and new firms to the industry.

If the market price established in the industry is higher than the minimum average cost, then the possibility of obtaining economic profit will serve as an incentive for new firms to enter the industry. As a result, industry supply will increase and the price will decrease. Conversely, if firms make losses (at prices below minimum average cost), this will lead to many of them closing and capital flowing out of the industry. As a result, industry supply will decrease, leading to higher prices.

The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profit has no incentive to exit the business, and other firms have no incentive to enter the business. There is no economic profit when price equals minimum average cost. In this case we are talking about long-term average costs.

Long-term average costs are the costs of producing a unit of output in the long run. Each point corresponds to the minimum short-term unit costs for any enterprise size (output volume). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs (economies of scale were discussed in the previous chapter). The minimum long-term costs determines the optimal size of the enterprise. If the price is equal to the minimum long-term unit cost, the firm's long-run profit is zero.

Production at minimum average cost means production at the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, primarily for the consumer. It means that the consumer receives the maximum volume of output at the lowest price allowed by unit costs.

A firm's long-run supply curve, like its short-run supply curve, is the portion of its long-run marginal cost curve that lies above the minimum point of long-run unit costs. The industry supply curve is obtained by summing the long-term supply volumes of individual firms. However, unlike the short-term period, the number of firms in the long-term may change.

So, in the long run in a perfectly competitive market, the price of a product tends to minimize average costs, and this, in turn, means that when long-run industry equilibrium is achieved, the economic profit of each firm will be zero.

At first glance, the correctness of this conclusion can be doubted: after all, individual firms can use unique production factors, such as soils of increased fertility, highly qualified specialists, and modern technology that allows them to produce products with less materials and time.

Indeed, the resource costs per unit of output of competing firms may differ, but their economic costs will be the same. The latter is explained by the fact that in conditions of perfect competition in the factor market, a firm will be able to acquire a factor with increased productivity if it pays for it a price that raises the firm’s costs to the general level in the industry. Otherwise, this factor will be purchased by a competitor.

If the firm already has unique resources, then the increased price should be taken into account as an opportunity cost, because at that price the resource could be sold.

What motivates firms to enter an industry if long-run economic profits are zero? It all depends on the possibility of obtaining high short-term profits. The influence of external factors, in particular changes in demand, can provide such an opportunity by changing the situation of short-term equilibrium. Increased demand will bring short-term economic benefits. In the future, the action will develop according to the scenario already described above.

Thus, perfect competition has a unique self-regulation mechanism. Its essence is that the industry reacts flexibly to changes in demand. It attracts a volume of resources that increases or decreases supply just enough to compensate for changes in demand, and on this basis ensures the long-term break-even of firms operating in the industry.

If we connect two industry equilibrium points in the long run with various combinations of aggregate demand and aggregate supply, then the industry supply line in the long run is formed - S1. Since we have assumed that factor prices are constant, line S1 runs parallel to the x-axis. This is not always the case. There are industries in which resource prices increase or decrease.

Most industries use specific resources, the number of which is limited. Their use determines the ascending nature of costs in this industry. The entry of new firms will lead to an increase in demand for resources, the emergence of their shortage and, as a result, an increase in prices. As each new firm enters the market, scarce resources will become more and more expensive. Therefore, the industry will only be able to produce more products at a higher price.

Finally, there are industries in which, as the volume of a resource used increases, its price decreases. In this case, the minimum average cost is also reduced. Under such conditions, an increase in industry demand will cause in the long run not only an increase in supply, but also a decrease in the equilibrium price. Curve S1 will have a negative slope.

In any case, in the long run, the industry supply curve will be flatter than the short-run supply curve. This is explained as follows. Firstly, the ability to use all resources in the long term allows you to more actively influence price changes, therefore, for each individual firm, and, consequently, the industry as a whole, the supply curve will be more elastic. Secondly, the possibility of “new” firms entering the industry and “old” firms leaving the industry allows the industry to respond to changes in market prices to a greater extent than in the short term.

Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the minimum point of the industry's long-term supply price is higher than the minimum point of the short-term supply price, since all costs are variable and must be recovered.

So, in the long run, under conditions of perfect competition, the following will happen:

A) the equilibrium price will be established at the level of minimum long-term average costs, which will ensure long-term break-even for firms;
b) the supply curve of a competitive industry is a line passing through the break-even points (minimum average costs) for each level of production;
c) with a change in demand for industry products, the equilibrium price may remain unchanged, decrease or increase, depending on how prices for production factors change. The industry supply curve will look like a horizontal straight line (parallel to the x-axis), ascending or descending line.

Disadvantages of Perfect Competition

1) perfect competition takes into account only those costs that pay off. In conditions of insufficient specification of property rights, underproduction of positive and overproduction of negative externalities is possible;
2) does not provide for the production of public goods, which, although they bring satisfaction to consumers, cannot be clearly divided, valued and sold to each consumer individually (national defense, etc.);
3) perfect competition, which involves a huge number of firms, is not always able to ensure the concentration of resources necessary to accelerate scientific and technological progress (basic research, knowledge-intensive and capital-intensive industries);
4) promotes unification and standardization of products. It does not fully take into account the wide range of consumer choices;
5) the market system of income distribution inevitably leads to the emergence of property inequality. Economic differentiation of the population, which is not counteracted by state policy, tends to intensify and turn into social and political differentiation. This not only interrupts social stability, but also becomes a powerful factor in increasing economic inefficiency;
6) the inevitable consequence of the market is unemployment, or underemployment of the most important resource - labor;
7) The market develops in people not only positive personal qualities, but also negative ones, for example, selfishness, cruelty, lack of interest in the situation of other people.

The disadvantages of a perfectly competitive market include:

A) low production volume;
b) high level of advertising costs;
c) price instability;
d) low level of R&D expenses (research and development).

Pure perfect competition

In a purely competitive market, no individual buyer or seller has much influence on the level of current market prices of goods. The seller cannot ask for a price higher than the market price, since buyers can freely purchase at it any quantity of goods they need. In this case, firstly, we mean the market for a certain product, for example wheat. Secondly, all sellers offer the same product on the market, i.e. the buyer will be equally satisfied with wheat purchased from different sellers, and all buyers and sellers have the same and complete information about market conditions. Third, the actions of an individual buyer or seller do not influence the market.

The functioning mechanism of such a market can be illustrated with the following example. If the price of wheat rises as a result of increased demand, the farmer will respond by planting more wheat next year. For the same reason, other farmers will plant larger areas, as well as those who have not done this before. As a result, the supply of wheat on the market will increase, which may lead to a fall in the market price. If this happens, then all producers, and even those who have not expanded the area under wheat, will have problems selling it at a lower price.

Thus, a market of pure competition (or perfect) is considered to be one in which the same price is set for the same product at the same time, which requires:

Unlimited number of participants in economic relations and free competition between them;
absolutely free access to any economic activity for all members of society;
absolute mobility of factors of production; unlimited freedom of movement of capital;
absolute market awareness of profit margins, demand, supply, etc. (implementation of the principle of rational behavior of market subjects (optimization of individual well-being as a result of increased income) is impossible without the availability of complete information);
absolute homogeneity of goods of the same name (absence of trademarks, etc.);
the presence of a situation where no one participant in competition is able to directly influence the decision of another through non-economic methods;
spontaneous pricing in the course of free competition;
absence of monopoly (presence of one producer), monopsony (presence of one buyer) and non-interference of the state in the functioning of the market.

However, in practice, a situation where all these conditions are present cannot exist, therefore there is no free and perfect market. Many real markets operate according to the laws of monopolistic competition.

Improving production, reducing production costs, automating all processes, optimizing the structure of enterprises - all this is an important condition for the development of modern business. What's the best way to get businesses to do all this? Only the market.

The market refers to the competition that arises between enterprises that produce or sell similar products. If there is a high level of healthy competition, then to exist in such a market it is necessary to constantly improve the quality of the product and reduce the level of overall costs.

The concept of perfect competition

Perfect competition, examples of which are given in the article, is the exact opposite of monopoly. That is, this is a market in which there is an unlimited number of sellers who deal in the same or similar goods and at the same time cannot influence its price.

At the same time, the state should not influence the market or engage in its full regulation, since this can affect the number of sellers, as well as the volume of products on the market, which is immediately reflected in the price per unit of goods.

Despite the seemingly ideal conditions for doing business, many experts are inclined to believe that, in real conditions, perfect competition will not be able to exist in the market for long. Examples that confirm their words have happened repeatedly in history. The end result was that the market became either an oligopoly or some other form of imperfect competition.

may lead to decline

This is due to the fact that prices are constantly decreasing. And if the human resource in the world is large, then the technological one is very limited. And sooner or later, enterprises will move to the point where all fixed assets and all production processes will be modernized, and the price will still fall due to competitors’ attempts to conquer a larger market.

And this will already lead to functioning on the verge of the break-even point or below it. The situation can only be saved by influence from outside the market.

Main features of perfect competition

We can distinguish the following features that a perfectly competitive market should have:

A large number of sellers or manufacturers of products. That is, the entire demand that exists on the market must be covered not by one or several enterprises, as in the case of a monopoly and oligopoly;

Products on such a market must be either homogeneous or interchangeable. It is understood that sellers or manufacturers produce a product that can be completely replaced by the products of other market participants;

Prices are set only by the market and depend on supply and demand. Neither the state nor specific sellers or manufacturers should influence pricing. The price of a product should be determined by the level of demand as well as supply;

There should be no barriers to entry or exit into a perfectly competitive market. Examples can be very different from the field of small business, where special requirements have not been created and special licenses are not needed: atelier, shoe repair services, etc.;

There should be no other external influences on the market.

Perfect competition is extremely rare

In the real world, it is impossible to give examples of perfectly competitive firms, since there is simply no market that functions according to such rules. There are segments that are as close as possible to its conditions.

To find such examples, it is necessary to find those markets in which small businesses mainly operate. If the market where it operates can be entered by any company and easily exited, then this is a sign of such competition.

Examples of perfect and imperfect competition

If we talk about imperfect competition, monopoly markets are its clear representative. Enterprises that operate in such conditions have no incentive to develop and improve.

In addition, they produce such goods and provide such services that cannot be replaced by any other product. This explains why it is poorly controlled and established through non-market means. An example of such a market is an entire sector of the economy - the oil and gas industry, and the monopoly company is OJSC Gazprom.

An example of a perfectly competitive market is the car repair industry. There are a lot of different service stations and auto repair shops both in the city and in other localities. The type and amount of work performed is almost the same everywhere.

It is impossible in the legal field to artificially increase prices for goods if there is perfect competition in the market. Everyone has seen examples confirming this statement more than once in their life on the regular market. If one vegetable seller raised the price of tomatoes by 10 rubles, despite the fact that their quality is the same as that of competitors, then buyers will stop buying from him.

If when can influence the price by increasing or decreasing supply, then in this case such methods are not suitable.

With perfect competition, you cannot independently increase the price, as a monopolist can do.

Due to the large number of competitors, it is impossible to simply increase the price, since all customers will simply switch to purchasing relevant goods from other enterprises. Thus, an enterprise may lose its market share, which will entail irreversible consequences.

In addition, in such markets there is a reduction in prices for goods by individual sellers. This occurs in an attempt to "win" new market shares to increase revenue levels.

And in order to reduce prices, it is necessary to spend less raw materials and other resources on the production of one unit of product. Such changes are possible only through the introduction of new technologies and other processes that can reduce the level of costs of doing business.

In Russia, markets that are close to perfect competition are not developing fast enough

If we talk about the domestic market, perfect competition in Russia, examples of which are found in almost all areas of small business, is developing at an average pace, but it could be better. The main problem is the weak support of the state, since so far many laws are aimed at supporting large manufacturers, who are often monopolists. In the meantime, the small business sector remains without special attention and the necessary funding.

Perfect competition, examples of which are given above, is an ideal form of competition from the understanding of pricing criteria, supply and demand. Today, in no other economy in the world can one find a market that meets all the requirements that must be met under perfect competition.

1. The concept of competition

Competition

long-term periods

The concept of competition.

Market competition is the struggle for limited consumption demand, waged between firms in the market segments available to them.

Competition forces them to take into account the interests of consumption, and therefore the interests of society as a whole.

According to the degree of development of competition, there are 4 main types of markets:

1. Perfect competition market;

2. Market of imperfect competition, subdivided:

a) monopolistic competition;

b) oligopoly;

c) a monopoly.

The perfect competition model is based on on four main conditions:

1. Products must meet the condition of product homogeneity. This condition actually means that the difference in prices is the only reason why a buyer can choose one seller over another.

2. Neither sellers nor buyers influence the market situation in the industry due to the smallness and number of all market entities. The volume of consumer purchases (or sales by the seller) is so small that a decision to decrease or increase this volume creates neither a surplus nor a shortage.

Market actors are unable to influence prices.

3. Barriers to entering the market any competitive advantages of firms already operating in the industry compared to those trying to get there are called.

The most typical barriers to entry are:

Large starting capital required to open a business;

Uniqueness of the product or technology used;

Legal restrictions.

Market exit barriers are called:

- losses inevitable when trying to withdraw a business from a given industry and move it to another. Most often, the exit barrier is high sunk costs, i.e. the need to sell the company's assets that have become unnecessary for next to nothing.

- There are also legal restrictions. For example, by providing a lease for a certain area for a store, the municipality can stipulate the preservation of its profile for a certain time (for example, not to close a socially important pharmacy in a residential area).

The condition of the insurance company is the absence of barriers to entry and exit from the market.

When such barriers exist, sellers begin to behave as a single corporation, even if there are many of them and they are all small firms.

In Russia, such restrictions are widely observed in fruit and vegetable markets, which are almost impossible for a simple peasant to penetrate.

4. Information about prices, technology, probable profits, etc. is freely available to everyone. There are no trade secrets. Those. the firm makes decisions in conditions of complete certainty regarding the market situation.

In reality, markets that fully satisfy the conditions of the insurance company do not exist.

For all its abstractness, the concept of SC plays an important role:

Firstly, the model of a perfectly competitive market allows us to judge the principles of functioning of those markets where there are many small firms offering similar products, and where conditions have developed that are close to the conditions of the middle class.

Secondly, it allows - albeit at the cost of great simplifications of the actual market picture - to understand the logic of the company's actions.

Perfect competition criterion

Taking into account the listed conditions of SC-ii, the demand curve for the company's products will look like a horizontal line (absolute elasticity of demand).

The presence of perfectly elastic demand for a firm's products is usually called criterion of perfect competition.

Principles of firm behavior in a perfectly competitive market

Profit maximization as the main motive of the company's behavior.

Profit– the difference between total revenue and total costs for the sales period.

In the conditions of the middle class, the most important decisions on managing a company are primarily related to establishing the volume of production that allows achieving maximum profit.

What are the criteria for choosing the optimal volume??

Before answering this question, each company must fundamentally decide whether it is worth engaging in production at all. Those. find a criterion for the feasibility of production.

This criterion is different for short-term and long-term periods.

Long term

If we talk about the long term, then it is obvious that such a criterion will be the presence of non-negative economic profit. At a minimum, the firm must earn an accounting profit. In case of losses, the owners resort to liquidation, i.e. closing and sale of property.

Working with losses, the company has to make loans that it is not able to repay. Sooner or later, such a policy leads to bankruptcy, or insolvency, i.e. to the firm's inability to pay its obligations.

After a company is declared bankrupt (by court), the former owners are removed from its management, and the property is used to cover debts to creditors.

Bankruptcy Institute is one of the most important mechanisms for ensuring the social responsibility of entrepreneurs in a market economy.

Having freedom of enterprise, i.e. the right to arbitrarily make any (legal) business decisions, entrepreneurs must pay for possible mistakes with the loss of their property.

Discontinuation of production

In the event that the market price of a product is below the minimum value of average variable costs, the firm stops production.

Indeed, this price not only does not cover all costs, it is not able to fully cover variable costs. Those. Each released unit, in addition to the inevitable loss in the amount of fixed costs, also adds the uncovered part of the variable costs associated with the release of this particular product.

ATS

The amount of losses at production volume Q1 is equal to the area of ​​the entire shaded rectangle (ATC1-P)xQ1.

AFC1=(ATC1-AVC1)xQ1 – on the graph they are equal to the area of ​​the rectangle between the average cost curves.

The entire portion of the shaded rectangle below the AVC curve and before the price is a net loss due to failure to discontinue production.

By shutting down the plant, you can save money on them. This is exactly what many firms find themselves doing in difficult situations.

In practice, another motive often plays an important role in temporarily stopping production: the pause allows you to clear warehouses by selling off previously accumulated unsold surplus of finished products.

Please note that a short-term cessation of production does not mean the liquidation of the enterprise (company) itself. The company is simply forced to temporarily stop production. It will stand until the market price increases to a level at which production makes commercial sense. But the company can also be convinced of the long-term nature of the price decrease. Then it will finally cease to exist.

Release optimization

The choice of a fundamental behavior option (maximizing profits, minimizing losses, temporarily stopping production) represents the first step of a company towards optimizing its position in the market.

The next step is to pinpoint the level of production that will maximize profits or minimize losses.

As we have already said, this can be done by directly comparing gross income and gross costs. This is exactly what individual entrepreneurs of small firms often do, who do not have the opportunity to rely on powerful accounting departments, but from practical experience they know very well both the market price and all types of their costs.

But a more accurate way to determine the optimal production size is to compare marginal revenue and marginal cost.

Increasing output increases profits only if the income from the sale of an additional unit of production exceeds the production costs of this unit, i.e. if MR is greater than MC.

On the contrary, when the costs associated with the production of one more unit of product are higher than the income MR brought through its sale, it is less than MC, then, having produced the corresponding portion of the product, the firm only reduces its profits or increases losses.

Therefore, the maximum profit is achieved at the intersection point of MR and MC.

This pattern in economics is usually called rule of equality of marginal revenue and marginal cost. According to it, profit maximization (loss minimization) is achieved at a production volume corresponding to the point of equality of marginal costs and marginal revenue.

This rule is true not only for perfect competition, but also for other types of markets.

Under conditions of perfect competition, profit maximization (loss minimization) is achieved at a production volume corresponding to the point of equality of marginal costs and prices.

a) Profit maximization

b) Minimizing losses

ATS

c) cessation of production

On graph a) Let us note that the production volume Q0 in the case of profit maximization is greater than the production volume Qmin, which would correspond to the minimum level of average total costs, i.e. technological optimum of production.

The economic meaning of this is that at point Qmin the maximum profit per unit of output is achieved. The graph shows that it is here that the distance between the ATC and P curves is greatest. However, the firm does not maximize the specific profit per unit of output, but the gross profit from all production. Therefore, it makes no sense for her to refuse to produce units of output lying between Qmin and Q0.

Even if their profits per unit of output are somewhat lower, they will also contribute to the increase in gross profit. The inequality MR›MC applies here, which means the firm benefits from the release of each unit of additional output.

Graph b) shows the situation of minimizing losses. In this case, the company is guided by the MR=MC rule, choosing the production volume Q0. In this case, it turns out to be below the technologically optimal level Qmin.

Those. at a reduced price level (when they are below the break-even point), the technological optimum becomes economically unattainable. During the protracted crisis in our country, many domestic enterprises experienced this pattern: the low level of demand forces them to underutilize their production capacities.

When production is stopped, the MC=MR rule does not apply .

Thus, this rule has the limitation that it is not applicable at price levels below the minimum value of average variable costs.

By studying a firm's behavior at different price levels, we are essentially describing its supply curve.

The MC curve of a competitive firm in the short run will simultaneously be its supply curve for that period.

Consequently, the product supply curve in the short run is limited only by that segment of the marginal cost curve MC, which is located above the minimum point of the average variable cost curve. In other words, the supply curve coincides with the marginal cost curve only at MC › AVCmin.

The supply curves of individual firms make up the supply curve of a competitive industry.

Perfect competition model.

1. The concept of competition

2. Principles of behavior of a company in a perfect market

Competition

3. Equilibrium of a competitive industry in the short-term and

long-term periods

The concept of competition.

The behavior of a company and its choice of production volumes depend on the type of market in which it operates.

The most powerful factor dictating the general conditions for the functioning of a particular market is the degree of development of competitive relations in it.

Introduction

The topic of this course work is “Features of a company’s behavior in conditions of modern competition. Typical methods of competition."

The main distinguishing feature that reveals the advantages of a market economy over a centrally planned economy is competition. It is precisely this that contributes to the progress of a market society and the forward movement of civilization.

Every truly competent economist knows that the more efficient the market is, the more it satisfies the conditions of perfect competition. Only in such a market do prices serve as reliable information about what, how, how much and for whom to produce.

Due to the fact that a real market economy is unthinkable without competition, there is an urgent need to study competition and the possible behavior of enterprises in its conditions, its level and intensity, methods of competition, knowledge of the strengths and market opportunities of the strongest competitors, prospects for competition in selected markets ,.

Consideration of the behavior of an enterprise in a perfectly competitive market and standard methods of competition is of interest, primarily because the very attitude towards the content of the term “competition” in the domestic economy has recently undergone a fundamental change. Competition and all the processes associated with it (demonopolization) are new for Ukraine and therefore their study is important and relevant for us.

Coursework objectives:

Consider the principles of the existence of a perfectly competitive market;

Analyze the characteristics of the behavior of a firm in a perfectly competitive market in short-term and long-term conditions.

Consider typical methods of competition.

Behavior of an enterprise in conditions of perfect competition

Conditions for the emergence of perfect competition

What are the conditions for the emergence of such a competitive environment and why does it most push firms to increase economic efficiency?

A market of perfect competition can be stable only if all the necessary conditions are present at the basis of its existence:

1. A large number of firms producing homogeneous products, and a small number of market entities. The smallness of market entities means that the supply (demand) volumes of even the largest sellers (buyers) are so small compared to the total volume of sales on the market that these entities cannot influence the market price.

Theoretically, the situation described above is, strictly speaking, impossible. Indeed, a shift in the individual supply curve of any producer will inevitably lead to some shift in the market (total) supply curve, which will cause a change in the equilibrium price. However, in real life, small firms usually do not influence the market price. To eliminate this contradiction, the smallness of market entities is interpreted as a situation in which the share of each firm in total sales is infinitely small, and the number of firms in the industry is infinitely large. Examples include agricultural markets, the stock exchange and the foreign exchange market.

A company that has its products in a competitive market is called a competitive company, because these firms cannot influence the price; they act as price takers (price takers).

2. Homogeneity of products from different enterprises, that is, there is no danger that consumers will generally prefer the products of one of the companies because of their striking superiority in properties or quality compared to the products of other companies. For example, the potato market is very likely to be competitive. Many farmers sell potatoes every day. None of them have more than 1% of the market's daily sales volume. If the share of one of them, due to additionally sold potatoes, increases to 2%, then this will not affect the market price in any way.

In terms of utility theory, product homogeneity means that products from different producers are completely interchangeable for each buyer, and the marginal rate of substitution of one product for another is equal to one. For example, replacing an orange from one manufacturer in a set with an orange from another manufacturer does not change the utility of the set. In this case, each buyer indifference curve is a straight line segment inclined to the coordinate axes at an angle of 45 0. In Fig. 1.1, the indifference curve for products from two different manufacturers is denoted by AB. X denotes the quantity in the product set of the first manufacturer, and Y the quantity of the second manufacturer.

In real life, absolutely homogeneous products are extremely rare (distilled water, shares of a corporation, a subway token). Oil, sugar, and tomatoes have a high degree of homogeneity. And we certainly cannot consider goods such as books, airline tickets, and toys to be homogeneous.

3. There are no entry barriers for a new manufacturer to enter the industry and the possibility of free exit from it. The entry barrier to entry into the industry may be:

E Availability of patents or licenses providing preferential rights to produce certain products (production of alcoholic beverages, export licensing);

Ё Relatively high costs required to organize production in the industry (heavy industry);

E Significant returns to scale of production, which provide advantages to large enterprises that have already benefited from expansion of production (natural monopolies);

Ё Attaching buyers to sellers (maintenance of a residential building by a certain utility service);

Ё Limitation of the mobility of production resources (registration rules for citizens often impede the free movement of labor resources between territorial labor markets).

Free entry and exit into an industry ensures that there is no agreement between producers operating in the industry to raise prices by reducing output. Any increase in prices can attract new firms into the industry, which will increase supply.

4. Equal access to all types of information (“market information transparency”). This means that all buyers have complete information about the characteristics of the product and its prices, and manufacturers have information about production technology and prices for production factors. If sellers have more information about the consumer properties of a product than buyers, then such a market is called a market with asymmetric information. An example is the medical services market, in which buyers (patients) cannot competently judge the quality of services provided to them, the degree of their need, and the correspondence of the quality of services to their price.

5. Perfect mobility. The buyer (seller) can instantly conclude a deal with any seller (buyer), and this does not require additional costs. Currently, perfect mobility of market participants is achieved when concluding transactions using a computer. In other cases, “switching” one buyer from one seller to another usually requires time and often travel costs. If there is perfect mobility and perfect information of market subjects, then a homogeneous product is sold at a single price.

6. Rational behavior of all participants pursuing their own interests. Collusion in any form is excluded.

7. The costs of firms for the production of goods do not differ very significantly due to the similarity of technology and prices for resources purchased for production. If this condition is not met and one of the firms has significantly lower production costs, then it will be able to easily upset the market equilibrium, for example, by offering goods at a lower price (inaccessible to other competitors) and thereby capturing a significantly larger market share than its competitors ( condition 1) will be violated.

7. Transport costs do not play a big role in the formation of supply, that is, there is no danger that many manufacturers will find themselves uncompetitive due to too expensive delivery of their goods to customers (their prices will ultimately be higher than those of competitors whose enterprises are located closer to the main sales markets).

7. Relevance. Pure competition is quite rare in practice. This does not mean, however, that competitive market analysis is an inappropriate logical exercise.

There are few industries that come closer to a competitive model than any other market structure. For example, many features of American agriculture are easier to understand if we know how competitive markets operate.

Pure competition is the simplest situation to which the concepts of “income” and “costs” are applicable. Pure competition provides a clear, multi-valued starting point for any discussion of pricing and output determination.

The operation of a pure competitive economy provides us with a template or standard against which to compare and by which the performance of a real economy can be judged. In short, pure competition is a market model that helps to understand and appreciate the meaning of the real economy

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