Perfect Competition - Essay Example

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According to the research findings the market with perfect competition is characterized by many small buyers and sellers such that none can influence market conditions; all firms are price takers. The products sold are identical and have close substitutes and this makes it hard for such a condition to be met for in reality, a market has differentiated products due to technological innovations. An example of such products includes agricultural products such as a bushel of wheat. Firms are free to enter or exit the market without any problem and also the factors of production are mobile. The market is also based on the assumption that all the participants have perfect information regarding the prices and quality of products. The buyers thus are able to make choices of the products they want to buy and the producers are aware of what the buyers want hence it is easy to decide on the quantity to produce. Since the participants have perfect information regarding the market and are free to enter and exit at any time, there are no transaction costs incurred in the exchange of goods. The profit maximization of the firms occurs where marginal revenue is equal to marginal cost and the market price is equal to marginal cost. Due to these conditions, it is very rare to have perfect competition although technological advancements are driving markets towards such a situation. For example, the trade in currency or money markets where participants are assumed to have perfect information and currency is same regardless of where it is being traded. ...Show more

Summary

This research will begin with the statement that there are various types of market systems in an economy such as monopoly, oligopoly and free markets depending on the number of buyers and sellers in the market as well as the type of products traded. …
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