Perfect Competition Essay

In the long run, these firms cannot make economic profits, but they break even. However, there is a time when there is a small number of producers and this renders firms to make a positive economic profit for a short time before other producers join the market. Firms in the perfect competition experience the costs of input and output costs since these are not fixed. The figure below represents this situation on the firm and market perspective. On the market side, D1 and S1 present the equilibrium of the demand and supply in the short run. Prices in this market structure are set by the market forces and not by firms. Increase in demand of goods in subsequently accompanied by increased supply.

Price rises to P2 for the short run, but it goes back to P2 after a long run. Goods in the perfect competition are completely inelastic. Sellers sell similar products and increase in price means customers will start consuming cheaper goods from competitors. The real-life example of the firm in this market structure is the Restaurants industry. They sell similar products with other firms in the same industry, out their products are slightly differentiated. Differentiation gives some firms edge in the market over the others. Profitability of the firms in this market structure is on the short run and the long run basis. Short run profits. However, prices are not set high above the market price. High prices on a certain product will lead to buyers consuming a competing good since they all serve as close substitutes.

Price should always be equal to average cost (Nikaido 54) Goods sold in this market are highly elastic. They all serve as close substitutes of each other and increase of the price by one firm leads to increased consumption of the competitors' product. Government interaction in this market structure will be to reduce unnecessary competition. The reason behind this is that these firms believe the players will destroy the market coordination which they enjoy (Nishimori and Hikaru 60). However, the market can also be having barriers which have been set by the government making market entry difficult. Oligopoly is the market structure which produces cartels when the competing firms decide to collide due to competitive pressure. When all the firms join hands, they have the power to set the prices high by controlling the supply thus always keeping the demand high.

Firms under cartels always enjoy super profits in both short and long run periods. Government intervention may also be in the form of saving small industries who are suffering under the big firms. International trade does not affect this kind of market structure when the prices were set by the market forces. Foreign players find it difficult to enter such a market because the cartels always set a lot of barriers. Monopoly Monopoly market structure is the type of market where there are only one seller and very many buyers. Goods sold in this market have no close substitutes and the firm is the price setter. The move is one of the profit expansion methods which works by reaping on the consumer surplus as shown on the figure below (Andersen and Henrik 53).

Price changes do not always come from increased demand in monopolistic market structure. The demand for the goods may rise, but it will not be accompanied by a subsequent increase in prices. This leads to a situation like the one presented in the graphs below wherein the first graph there are output X1 is sold at two different prices P1 and P2. A situation like this does not present the supply which was supposed to increase after demand increased but there I subsequent increase in price. i. e Tax holidays. Section 2 The market structure I would prefer to buy products from is a perfect competition. There is symmetric information about the goods in the market and this makes the market forces to be the price setters.

Prices on the goods reflect the total cost for their production and there will be no overpricing which harms consumers. This is because even if the price setting depends on the behavior of the competitor, the price is still above the average cost. Firms in this market always enjoy profits and they are not affected by market threats. Characteristics of the oligopoly market. There are few sellers who are selling homogeneous products or differentiated product to many buyers. Interdependence in the price setting leads to communication among the players which results in market coordination and possible collusion. Azevedo, Eduardo M. , and Daniel Gottlieb. "Perfect competition in markets with adverse selection. " Econometrica 85. Becker, Gilbert. (PSME-6). Vol. Princeton University Press, 2015. Nishimori, Akira, and Hikaru Ogawa.