Syndicate
Facing Up To Competition Requirements for Perfect Competition
Facing Up To Competition: Companies can confront or not confront a lot of competition from other companies. In one end you will find the monopoly, in which a company does not have competition because it is the only company in that specific industry. On the other extreme we can find the perfect competition, which is a situation in which a company competes with many other companies in an industry of which all of these produce an identical good. Amongst these two extremes there are other situations such as oligopoly, in which there are two or three or only a few companies in a certain industry; the imperfect competition, which is the monopolistic one, is the one in which there are many competitors and each one produces a good that is slightly different.
In this we are going to give you some insight on how companies behave when there is perfect competition mainly due to the fact that it is the most common and the easiest one to understand. The topic is that simple because when there are a lot of competitors in an industry in which all the companies produce identical goods, none of them have the control over the prices they charge.
Requirements for Perfect Competition: In order to see why companies that are under perfect competition do not have control over the prices they charge, it is very important to understand that perfect competition has to do with three things about the companies in an industry, which are:
- That all of them sell identical or nearly identical products.
- That there are many companies.
- That each one of them only represents a small part of the industry.
Wheat is a perfect example of an industry that satisfies each one of these three criteria. There are as we all know many, very many, farmers that produce wheat and each one of them only produces a small percentage of the wheat that is cultivated every year in different countries and this is a product that is basically exactly the same every where you go.
Now if we want to see how or why all these things imply that the individual farmers do not have any control over the price of wheat, start out by thinking about the fact that in first place they are all producing a good that is almost exactly identical no matter where you are. Given that wheat from a farm looks like any other wheat, the only way a wheat cultivator in a region would be able to convince you to buy from him and not from the other guy, his competition in this case, would be for him to lower the price for you. Due to the fact that wheat is the same everywhere, the only thing you would be interested in is the price being lower then the other guy’s.
Since the price in the market of wheat is the central point, we can use this analysis of supply and demand to estimate what the price of this good would be. The price, as we know is determined by the place where the demand curve of the market crosses with the supply curve of the market. So, how exactly are these curves determined?
- The curve of the wheat market demand is determined by adding individual demand curves of all the people that are interested in purchasing wheat.
- The curve of the wheat market supply can be seen by adding the individual supply curves of all the cultivators of wheat.
In this case this is where the two first factors of the perfect competition come in: due to the fact that there are so many wheat cultivators and since each one of them produces such a small amount of the total supply, the supply curve of the wheat market is not affected by the presence or absence of the supply curve of an individual producer. It would not matter if a billion tons were sold each year, the price of the market will not be affected by the decision of one farmer with only one thousand tons of wheat for sale to participate in the market or not. Since this is only a small part in the massive amount that is produced, it would not make a difference and the price of the market would not change.
If each player is too small to make the price of the market change, each one of them has to accept the price that has been determined by the interaction of the supply and demand in the market.