Perfect competition

Perfect competition (PC) is a term used to describe a market with many sellers of similar products and ease of entry into the market. Consumers and producers in perfectly competitive markets act independently and have knowledge of market choices and conditions. To most economists, perfect competition is the ideal level of COMPETITION against which markets are compared. Perfectly competitive markets have the greatest degree of competition, while MONOPOLY markets have the least competition. The benefit of perfect competition is efficiency. With many independent producers of the same PRODUCT and knowledge of market conditions, no one firm can charge a higher price, because consumers will choose to purchase from competing firms. If individual firms cannot produce the product at the market price, they leave the market. Only those firms that can produce efficiently will remain in the market. Like always and never, the word perfect is an absolute term. Economists sometimes say there are about as many truly perfectly competitive markets as there are people in Antarctica. Usually agricultural commodity markets, particularly ones where there are no government pricesupport programs, are given as examples of perfect competition. There are thousands of producers of most agricultural commodities. If they are not part of a COOPERATIVE, they act independently and have knowledge of market prices through market-reporting services; and unless technical expertise or huge amounts of CAPITAL act as a barrier to entry, it is relatively easy to enter the market. Few managers want to be part of perfectly competitive markets. Because there are many competitors producing the same product, no one firm has any pricing power. PC firms are known as price takers because managers in PC markets are constantly trying to cut COSTS and become more efficient. With no power to raise prices, managers can only increase PROFITs by cutting costs or differentiating their product. A market where there are many sellers of differentiated products is called MONOPOLISTIC COMPETITION. If a firm has a product that is different from competitors’ products (either really different or perceived as different by consumers), increasing its price will not result in losing all customers. Firms in PC markets constantly attempt to differentiate their products by emphasizing they are home-grown or chemical-free, or just by providing better service than competitors.