Market:
A market is a place of buying and selling goods and services takes place. It is a mechanism where people get involved in selling and buying goods and services. A buyer and seller are two driving forces of the market because they are the fundamentals that determine the rate of exchange.
The market structure provides information about how firms operate in the market, i.e. function of the market such as
The number of firms that make up the market.
The ease with which new firms may enter the market and begin producing the goods and services.
Differentiated products produced by the firm.
The knowledge about the market acquired by both consumers and sellers( perfect or imperfect)
Market control /market power also determines the market structure.
Perfectly Competitive Market Structure
Perfect competition is defined as the market structure where there are a large number of buyers and sellers with homogeneous products selling at a uniform price. In this market, both buyers and sellers have market information regarding the price of the product. Therefore firms can not charge different prices to different consumers. Here firm stands for a unit engaged in production along with a profit maximization objective. The industry is the group of firms that produces homogeneous products.
The price of the product is determined by the industry and all firms under the industry have to accept the price determined by the industry. Therefore, the industry is called price maker, and the firm is called price taker. buyers and sellers do not waste time or money to find each other. Sellers do not need to advertise.
The intersection of the market supply and demand curves yields the market price.
The interesting thing about this market structure is that the seller does not have to reduce the price of the product to increase sales. The price of the product remains constant. Total revenue increases at a constant rate, and the average revenue, and marginal revenue remain constant and equal. Therefore the average revenue and the marginal revenue curve become a horizontal straight line parallel to the x-axis. An individual firm's demand curve is a horizontal line at market price.
In a market system known as perfect competition, every company or corporation is offering the same good or service, and because they have no influence over their product prices, they are more likely to be price takers. Customers in this market have complete or perfect knowledge of the goods being sold. A completely competitive market is one in which there are many knowledgeable buyers and sellers, no monopolies exist, and every firm is a price-taker. Perfect competition is a term used to describe a standard that makes it possible to compare various market models. Although finding real-world examples of perfect competition can be challenging, one can discover many variations in everyday life. Let's use a farmer's market as an example, where there are many buyers and sellers of items. The perfect competition market exists in agriculture where products are exactly identical.
When all of the following criteria are satisfied, a market is said to be perfectly competitive:
Both buyers and sellers are many. The product being marketed is homogeneous, which means it lacks any distinguishing qualities or traits. There are no entry restrictions, such as government legislation or patents. Each company's production expenses are the same (i.e., they all use similar inputs). Companies can set pricing for their products that match their marginal costs (MC). Until full employment is reached and the price equals the marginal revenue, firms will continue to produce (MR).
The number of sellers is sufficient to meet consumer demand, but not excessively so that they can set the price. Therefore, there are no entry or exit barriers in a market with perfect competition. All players in these marketplaces have an equal ability to affect the price.
What are the drawbacks of a market with the perfect competition?
The main drawback of perfect competition is that there are no obstacles to entry or exit. As a result, some businesses may be put out of business by newcomers who enter the market whenever there is a chance to do so.
Based on where the AC and AVC curves cross the MC curve, we may divide it into three zones. The break-even point is defined as the location where MC crosses AC.
Price > AC and the company is profitable if the firm is running where price > break-even point. If the price is at the break-even point, the business is losing money.
The level of output at which the MC meets the AC curve at the minimum point of AC is known as the break-even point; if the price is at this level, the firm is making no economic profits.
If the price is above the shutdown-point price, the firm will continue to operate even though it is losing money in the short term because it is covering its variable costs; however, if the price is below the shutdown point, the firm will cease operations immediately because it is not even making enough money to cover its variable costs.
Conditions of Equilibrium
If AR>AC, supernormal profit
If AR = AC, normal profit
If (AR=AVC) < AC, loss
Supernormal Profit
Earnings = TR - TC
(TR/Q - TC/Q) x Q = Profit
ATC stands for the average total cost and TR/Q for average revenue. Profit, therefore, equals (P - ATC) x Q.
In a perfectly competitive market, a corporation is making economic profits if, when producing at its MC=MR point, it is selling its goods for more than its average total cost. Economic profits signify that the company is generating additional money on top of covering all of its direct and indirect costs.
Normal Profit
A firm is considered to be breaking even when it has paid all of its direct and indirect expenses. The company is simply making a NORMAL PROFIT. Study the graph and take notice of how the market's supply and demand have set the price at the firm's minimum average total cost. In this case, MC = MR.
The company is barely making enough money to cover its costs, therefore it has no economic profits but also no losses. Businesses have no motive to enter or leave this industry.
Economic Loss
In a perfectly competitive market, a firm will be minimizing its losses but not making any economic profit if it sells its goods at a price below its average total cost when manufacturing at its MC=MR point. Long-term, the loss-minimizing company will either leave the market or wait for other businesses to follow suit, reducing supply and driving up prices.
Since there is little demand in the market, the price at which the company may sell its goods is less than its average overall margin.
By manufacturing where MR=MC, the business is reducing its losses.
Since there are no entry barriers, these losses will eventually be eliminated as businesses leave the sector to prevent future losses.
Shut Down Point
At any price below P2, the firm will close down because the firm has to bear loss even on variable costs under such conditions, so point A is known as shut down point or close down point.
Long-run Profit Maximization of the Firm Under Perfect Competition
Each company can alter its supply in the long run in response to shifts in the demand for its product. It could be because different units have access to enough time or because the firm's inputs are all-sufficient. As a result, enterprises are in long-term equilibrium when they have adjusted their production facilities to produce at the minimum point of their long-term average cost curve, which is tangent to the demand curve (AR) determined by the market price.
Why normal profit over time in the long run?
It is a result of the enterprises' ability to enter and exit freely.
If the current company realizes the additional profit, they increase the size of its factory. Similar to how there is an excess of supply, new businesses are drawn and enter the market. The oversupply results in lower profits. Only businesses that are loss-bearing cease operations when there is a loss environment. Free exit would make a guarantee that no company experiences long-term losses.
What is your final decision as a business person in a perfectly competitive market?
Do production if the marginal benefit outweighs the marginal cost?
Don't do it if the marginal cost is greater than the marginal benefit.
