Dec 13, 2017 in Economics

Perfect Market

Introduction

Perfect market also known as perfect competition is a concept of economic theory. An industry consists of all the firms that sell products in a market. In a perfect market, all sellers are equal, and no individual seller can set the price of products. The product in a perfect market is homogeneous. There are many sellers and buyers and anybody can enter the perfect market. The supply and demand for the product, determine the price of the product. Each seller can sell whatever quantity they can produce to maximize profit at the equilibrium price. There is no perfect market in the real world. It is necessary to understand the conditions of perfect markets in order to understand the structure of other markets; monopoly, imperfect competition and oligopoly. The perfect market is a benchmark for evaluating other markets.

Differences between Perfect Market and a Monopoly

A monopoly is a type of market with market structures where there is only one single seller. A firm becomes a monopoly because of two reasons. One, the individual firm, introduced a new product into the market and is the only one what is capable of producing that product. This is because of acquiring patents for the product, or the seller is the only one who has the skill and know how to produce the product.  Secondly, a monopoly may exist from an industry that had many sellers. An industry in a perfect market may drive out many sellers due to certain factors. One seller remains and becomes the single seller in that industry. The seller also ensures that there are many barriers to bar out the other sellers from entering the industry again. Whereas perfect competition has many sellers and buyers, a monopoly has one single seller.

The pricing structure in a perfect market is different from a monopoly. In a perfect market, the sellers are price takers. Supply and demand for the product in a perfect market determines the price. The level at which all the sellers and buyers are willing and able to produce and buy the product will determine the price. This level is the market equilibrium. The sellers are free to sell any quantity that they can produce at the determined price. As there are infinite sellers, the quantity produced by one seller has acutely little impact on the price of the product. In a monopoly, the seller sets the highest possible price for the product. The consumers are at the mercy of the monopolist as there is no other seller. The problem with a monopoly is the price is higher than the price charged in a perfect market for the same product. If there were no barriers to entry in a monopolistic market, the number of sellers would increase due to the high profits, but the price will eventually drop. A monopolist has a higher markup on price than a seller in a perfect market. In a perfect market, the sellers cannot influence the price of the product, whereas, in a monopoly, the single seller can significantly influence the price of the product at any time.

A monopoly has high barriers to entry into the industry compared to the perfect market. In a perfect market, there are many sellers and anyone can sell the product as long as they sell at the equilibrium price. In a monopoly, there are no substitutes for the product. There are no other sellers selling similar products. In a perfect market, the products sold by all sellers are homogeneous, and there are substitutes for the product.

The costs of production in a monopoly are higher than in a perfect market. In a monopoly, the single seller is not motivated to reduce the cost of production as the consumer has no option but to buy the product from the single seller. The motive for the monopolist is to charge the highest price possible and maximize profit. In a perfect market, each seller will be motivated to reduce the cost of production as they cannot change the selling price. As they cannot change the price, they can make more profit when they reduce their cost of production. Profit maximization in a perfect market is when Marginal Cost is equal to Marginal Revenue. This is not the case in a monopoly.

Monopolies experience higher economies of scale than the seller in a perfect market. The monopolist produces a larger output than the individual seller in a perfect market. In this regard, the average cost of production will be lesser for a monopolist than for the singe seller in the perfect market. A perfect market will experience non increasing returns to scale as there will always be a willing buyer for their products. In a perfect market, there is perfect mobility of factors of production and perfect information amongst sellers and buyers. There are no transaction costs for the consumers in a perfect market.

In conclusion, a perfect market is the ideal situation for any industry. However, there is no perfect market in the real world. A monopoly exploits the consumer by charging exorbitant prices as other seller do not exist to produce the same product. Sellers in a perfect market cannot influence the price, they are price takers. Monopolists can charge any price for their products.  Most industries will exist in an imperfect market structure. Imperfect competition is the balance between the perfect market and the monopolistic market. Market structures such as oligopoly and I imperfect competition has a mixture of characteristics from the perfect market and the monopoly. In Economics, it is necessary to understand the structure of the perfect market or perfect competition as it acts as a benchmark in any industry.

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