Perfect Competition Essay

The spectrum of market structures varies diversely from highly competitive markets where there are a large number of buyers and sellers, each of whom having little or no power to alter the market price to a situation of pure monopoly where a market or an industry consists of one single supplier who enjoys considerable control over the market price, unless specific restrictions are placed directly by the government. A market structure such as the Chicken Meat Industry can be deemed as â€Å"Perfect Competition (PC)† as it fulfills the following mentioned assumptions: 1. There are many producers in the economy as mentioned in the question.   2. Each individual firm in the market is a Price Taker- the firms cannot control the price of chicken being sold in the market instead they have to simply accept the designated going market rate as the price of their product. This happens due to two major characteristics of Perfect Competition: a. As there are a large number of suppliers, each of them has a relatively small share of the overall market. As a result, these individual firms are unable to affect price by directly bringing about a change in its own supply because by assumption, each firm is small in size b. Due to the enormous competition faced by each firm, no single firm can increase the price that it charges above the price charged by the other firms in the market without losing business caused by a large substitution effect away from that firm 3. All firms produce identical goods, as in the case of Chicken Meat Industry where the product i.e. chicken is homogenous. The characteristics of chicken do not vary much from supplier to supplier as a result they are substitutes for each other. 4. Buyers are perfectly aware of the nature and quality of chicken being sold to them as well as being well informed about the price being charged by each seller. 5. All firms, present and future, are assumed to have equal access to all factors of production as well as any advancement in technology in the production process. 6. The chicken meat industry is characterized by freedom of entry and exit. There are no barriers to entry or exit of firms in long run as a result the present the market will always be open to competition from new entrants. 7. â€Å"No externalities in production and consumption so that there is no divergence between private and social costs and benefits†. (tutor2u.net) Market Analysis Short Run We know that Economic Profit is the difference between the Total Revenue (TR) and Total Cost (TC) where TC consists of both explicit and implicit costs. As Opportunity costs are the next best alternative forgone, a chicken meat supplier can have can have a significant accounting profit with little to no economic profit. In the Short Run, economic profits for individual chicken meat suppliers depend on the position of their Average Total Cost curves. (investopedia.com) In the short run the equilibrium market price, P1 is determined by the interaction between market demand and supply. This price is taken by each of the firms as their selling price which in turn is constant for each unit sold. Therefore, the AR curve also becomes the Marginal Revenue curve (MR). We know, a firm maximizes profits when marginal revenue = marginal cost, therefore the profit-maximizing output for a given firm is Q1. The firm sells Q1 at price P1. Because the ruling market price is greater than the Average Total Cost (P>AC), the firm will make positive economic profit as indicated by the shaded area below.