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Characteristics of Pure Competition

1. A purely competitive market is characterized by many small sellers and buyers, homogeneous products, and free entry and exit of firms. 2. The benefits of pure competition include increased total output, lower prices due to more firms, and efficient allocation of resources. However, it may benefit rich consumers more than poor. 3. Perfect competition has all the characteristics of pure competition plus consumers and firms have complete knowledge of present and future prices and costs.

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92 views2 pages

Characteristics of Pure Competition

1. A purely competitive market is characterized by many small sellers and buyers, homogeneous products, and free entry and exit of firms. 2. The benefits of pure competition include increased total output, lower prices due to more firms, and efficient allocation of resources. However, it may benefit rich consumers more than poor. 3. Perfect competition has all the characteristics of pure competition plus consumers and firms have complete knowledge of present and future prices and costs.

Uploaded by

Renalyn Miranda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

PRICING AND OUTPUT UNDER PURE COMPETITION

Pure Competition
Competition has always been part of human motivation and activity. Competition can make
wonders in the economy. Fair competition can make wonders both for human activities and in the market
system.
A market is said to be purely competition if:
1. There is a large number of sellers and buyers of the commodity, each too small
to affect the price of the commodity;
2. The outputs of all firms in the market are homogeneous, for example the product
of any seller is considered exactly alike in all respects to the product of any other
seller
3. There is perfect mobility of resources, for example there is freedom of entry into
and exit from the industry.
Merits of a purely competitive market:
1. Increase in output for the economy, hereby giving the consumers more choice
2. Lower prices because of the entry of more firms in the industry
3. Most efficient allocation of resources
Shortcomings of a purely competitive market:
1. Allocation of resources will benefit the rich more than the poor.
2. Spillover or external benefits and costs to society are not accounted for.
Pure and Perfect Competition
Economists make a distinction between pure and perfect competition. A market is said to be
perfectly competitive if it contains all the characteristics of pure competition plus additional
characteristics, for example consumers, resource owners, and firms in the market have perfect
knowledge of present and future prices and costs. When there is a large number of sellers and buyers of
a commodity, each would be too small a unit to affect the price of the commodity.

The Short Run


When we say short run, we refer to a time period in which a firm can vary its output but does not
have time to change its plant size.

The Note on Profits


The term “profit” can sometimes be ambiguous. Profit is a pure surplus or an excess of total
receipts overall cost of production incurred by a firm.

Short-Run Equilibrium: Marginal Approach


➔ Marginal revenue is the additional revenue obtained by putting the additional units of output in the
market.
➔ Marginal cost is the additional cost incurred when additional units of products are produced.

Price and Output in the Long Run


1. Completion by films of all desired adjustments;
2. Entry of new firms
3. Departure of old ones
Additional Terms
★ Economic profits - the difference between the net income of the firm and opportunity cost
of the inputs used; all economic value added.
★ Long run - a sufficiently long period of time where in a firm can complete all desired input
adjustments
★ Shutdown price - The price that would force the producers to stop production because of
losses.

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