Prefect Competition

By: EconomyWatch   Date: 14 October 2010

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The Theory of Perfect Competition deals with a hypothetical form of the market, where the power of influencing the market prices rests neither with the manufacturers nor the consumers. The standard definition of efficiency in economics believes that the Theory of Prefect Competition will end in a totally efficient result.

Assumptions guiding the Theory of Perfect Competition:

The concept of Perfect Competition is based on certain hypotheses as mentioned and described below:

Atomicity:

A market which is atomistic in nature, has several small producers and consumers. Here, the business houses act as the price-takers and not price-makers.

Free information Availability:

Both the customers and business firms must be well-acquainted with the actual prices expounded by all the commercial organizations of a country, to direct their activities uniformly on the right track.

Homogeneity:

In the Theory of Perfect Competition, both the commodities and the services act as the ideal substitutes of the commodities themselves under the existing market condition, making no distinction among the finished products produced by the competing firms.

Free entry:

All the commercial firms enjoy complete liberty with respect to entering or departing the market as per their whims.

Equality with respect to accessibility:

All firms have equal and simultaneous access to the available resources and the technologies involved in the methods of production.

Following are the behavioral assumptions of Perfect Competition Theory:

All the producers work towards the only aim of boosting up their profits.There is a constant effort on the part of the consumers to increase their utility levels.

Concepts related to the Theory of Perfect Competition:

The Shutdown Point:

It acts as the terminating point of the production for the business firms. This concept is applicable only when a business house in undergoing tremendous loses and needs to close down its manufacturing units. The loss is incurred when the Total Cost (TC) surpasses the Total Revenue (TR), when the Total Revenue is equal to the Total Variable Cost (TVC). Under such circumstances, a firm should shut down since it is unable to pay even the fixed costs.

Break even point:

It is the price at which the economic profit equals zero.

Benefits of the Perfect Competition Theory:

Both productive and allocative efficiencies exist side by side in an ideal competitive market.It facilitates an individual commercial firm to incur maximum profit within minimum time period.


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