Managerial Economics
A Written Report on Market Structure
Pure and Perfect Competition
Submitted by:
Dimalibot, Rean Laisa C.
Aquino, Nikka Mikaela A.
Bascos, Roschelle Mhay O.
Ouano, Missy Amaridge E.
Papio, Irish Joy L.
Sale, Jhestine May A.
Vergara, Janna Louisse A.
BSA1 – 4
Introduction
In the field of managerial economics, understanding the dynamics of market
structures is crucial for businesses striving to excel in competitive environments. As
students of this discipline, we set out to explore one of its fundamental pillars: pure
and perfect competition. Before delving into the details of these market structures, it
is important to grasp their significance in shaping economic outcomes and guiding
managerial decision-making.
Market structures provide the framework within which firms operate for market
dominance. They encompass a range of scenarios, from perfect competition,
characterized by numerous buyers and sellers trading homogeneous products, to
monopoly, where a single entity holds considerable market power. Understanding the
diversity of market structures enables businesses to formulate effective strategies to
address challenges and seize opportunities in their industries.
Pure and perfect competition represent theoretical frameworks that offer
insights into the ideal conditions of competitive markets. While these models may
seem abstract, their principles serve as a basis for comprehending market dynamics
and evaluating market efficiency.
As managerial economics students, we recognize the paramount importance of
comprehending how market structures influence the behavior of firms, consumers,
and overall market outcomes. Through this report, we aim to dissect the fundamental
concepts of pure and perfect competition, shedding light on their characteristics,
distinctions, and implications for managerial decision-making. By exploring these
topics, we aspire to equip ourselves and our peers with the knowledge and insights
necessary to thrive in competitive markets and contribute meaningfully to the field of
economics.
Objectives
Building upon our discussions and insights from the group, our refined learning
objectives are as follows:
1. Understand pure and perfect competition concepts thoroughly, relating them to
real-world scenarios.
2. Identify and explain the key characteristics that distinguish perfect competition.
3. Differentiate between perfect and pure competition.
4. Recognize the importance of competitiveness in markets.
Discussion
In economics, market structure refers to the way industries are categorized and
distinguished based on the level and type of competition for goods and services. It is
determined by the characteristics that shape how companies behave and the results
they achieve within a particular market. Economists often use the concept of "perfect
competition" as an ideal benchmark for comparison.
Perfect Competition
A perfectly competitive market is one in which the number of buyers and sellers
is very large, all engaged in buying and selling a homogeneous product without any
artificial restrictions and possessing perfect knowledge of market at a time. In the
words of A. Koutsoyiannis, "Perfect competition is a market structure characterized by
a complete absence of rivalry among the individual firms. According to R.G. Lipsey,
"Perfect competition is a market structure in which all firms in an industry are price-
takers and in which there is freedom of entry into, and exit from, industry."
Characteristics of Perfect Competition
The following are the conditions for the existence of perfect competition:
(1) Large Number of Buyers and Sellers:
A perfectly competitive market has many buyers and sellers. This means that
firms are known as 'price takers'. In other words, the firm must sell at the 'equilibrium'
price this is where the firm sells when supply and demand align. If not, they will go out
of business, as there are many other firms that sell the same good at a lower price. As
a result, customers have little cost of switching to a substitute good.
(2) Freedom of Entry or Exit of Firms:
The next condition is that the firms should be free to enter or leave the industry.
It implies that whenever the industry is earning excess profits, attracted by these
profits some new firms enter the industry. In case of loss being sustained by the
industry, some firms leave it.
3) Homogeneous Product:
In perfect competition, competitors sell similar products. This is otherwise
known as 'homogenous' in economic jargon. In simple terms, it means the products
are similar. As a result, the ability and willingness to switch is easy and costless. Each
firm produces and sells a homogeneous product so that no buyer has any preference
for the product of any individual seller over others.
(4) Absence of Artificial Restrictions:
In a free market, sellers have the freedom to sell their goods to any buyers, and
buyers have the freedom to purchase from any sellers without discrimination. Prices
are allowed to fluctuate based on supply and demand without interference from
producers, governments, or other entities. This means that there are no attempts to
control the supply, demand, or pricing of products, allowing prices to adjust naturally
based on market conditions.
(5) Profit Maximization Goal:
Every firm has only one goal of maximizing its profits.
(6) Perfect Mobility of Goods and Factors:
Another requirement of perfect competition is the perfect mobility of goods and
factors between industries. Goods are free to move to those places where they can
fetch the highest price. Factors can also move from a low-paid to a high-paid industry.
(7) Perfect Knowledge of Market Conditions:
In economic jargon, we call this 'Perfect Information'. This is where the
customer knows that the business down the road sells the same product at a lower
price. As a result, businesses are reluctant to raise prices ahead of a competitor.
Furthermore, customers are also aware of the quality of a product. For instance,
one firm may reduce costs to provide a lower quality product and make more profit.
Since customers have perfect information, they will know the product is Inferior. In
turn, they will switch to competitors putting the original firm out of business.
(8) Absence of Transport Costs:
Another essential condition is the absence of transport costs when moving
products from one location to another. This condition is crucial for perfect competition,
where goods must have consistent pricing regardless of location or time. If transport
costs are involved, even identical products will vary in price depending on the distance
from the supply source. This uniform pricing is fundamental for maintaining perfect
competition in the market.
(9) Absence of Selling Costs:
Under perfect competition, the costs of advertising, sales-promotion, etc. do
not arise because all firms produce a homogeneous product.
Perfect Competition vs. Pure Competition:
Perfect competition is often distinguished from pure competition, but they differ only
in degree. The first five conditions relate to pure competition while the remaining four
conditions are also required for the existence of perfect competition, but they differ
only in degree. The first five conditions relate to pure competition while the remaining
four conditions are also required for the existence of perfect competition.
Pure competition means a situation where there is competition without any
influence from monopolies. It is like a market where everyone competes freely without
any one company having too much control
Perfect competition, on the other hand, is even more ideal. It is when
competition is perfect in many ways, not just the absence of monopoly power. In this
situation, there are many buyers and sellers, products are identical, and there's easy
entry and exit from the market.
Even though real-world markets rarely match the conditions of perfect
competition, we study it because it helps us understand how economies work when
competition is at its best. It serves as a model to compare and evaluate how actual
markets function, even if they are not perfectly competitive.
Our group's discussion began with an engaging activity crafted to intrigue our
classmates and lay a solid foundation for our topic. Splitting the class into two teams,
each equipped with materials to simulate a market scenario, we aimed to illustrate the
dynamics of perfect competition in a tangible way. As we guided our peers through the
exercise of arranging commodities and computing prices, the significance of
homogeneous products and price-taking behavior became apparent, setting the stage
for a deeper exploration of market structures.
Transitioning to the main discussion, we started by defining market structure
and introduced perfect competition as its fundamental type. Using diagrams, we
explained perfect competition in both short and long-run scenarios. We then discussed
its key characteristics: a large number of buyers and sellers; freedom of entry and exit;
homogeneous products; absence of artificial restrictions; profit maximization goal;
perfect mobility of goods and factors; perfect knowledge of market conditions;
absence of transport costs; and absence of selling costs.
Expanding upon our exploration, we explored the difference between pure and
perfect competition, drawing insightful comparisons to deepen our classmates'
understanding. By highlighting the subtle distinctions between the two concepts, we
fostered an appreciation for the diverse landscapes of competitive markets.
Additionally, we engaged our peers in thought-provoking discussions on the real-world
implications of perfect competition, exploring its relevance in various industries and
economic contexts.
To test everyone's understanding, we organized a recap game. Before starting,
we made sure everyone was ready by encouraging a brief discussion. This game helped
reinforce key concepts and provided feedback on comprehension in a fun and inclusive
way. Through our interactive approach, we aimed to deepen everyone's understanding
of market structures and create an engaging learning experience for all.
The collaborative efforts not only deepened our own understanding of market
structures but also fostered a vibrant learning environment where curiosity thrived. By
combining theoretical insights with hands-on activities and interactive discussions, we
endeavored to cultivate a holistic understanding of perfect competition among our
peers, empowering them to navigate the complex landscapes of economics with
confidence and clarity.
References
The Tutor Academy. (n.d.). Perfect Competition – Economics Revision.
https://www.thetutoracademy.com/revision-notes/perfect-competition-as-a-levels-
ib-ial/
University of Rizal System. (n.d.). Unit IV – Market Competition - Module 8 Markert
Structures.
https://www.studocu.com/ph/document/university-of-rizal-system/bachelor-of-
arts-in-political-science/unit-iv-market-competition-module-8-markert-
structures/22347811
Learning and Insights
As a group, we discovered the importance of working together harmoniously.
Through our collaboration, we learned to tap into our collective creativity to craft an
engaging presentation. Before diving into our topic, we made sure to conduct thorough
research to ensure we understood the ins and outs of perfect competition.
We found our presentation to be very informative and engaging, as we delved
into the various attributes of perfect competition and its function as a market
structure. Through our exploration, we gained valuable insights into the principles and
dynamics involved in this type of market. We learned that a perfect competition,
characterized by a large number of buyers and sellers, as well as homogeneous
products, operates solely under the forces of supply and demand, with individual firms
having no influence on market prices. Survival and success in such a market depend on
our ability to keep up with competitors.
In perfect competition, firms cannot raise prices without risking losing
customers to other sellers offering identical products at lower prices. Therefore,
businesses must find alternative ways to attract consumers. One strategy involves
innovating marketing techniques, such as creative advertising, to differentiate
ourselves and capture the attention of buyers. Additionally, fostering strong
relationships with customers is essential for long-term success. Businesses must be
approachable, responsive, and attentive to the needs and preferences of our customer
base. By providing exceptional customer service and maintaining open lines of
communication, we can build trust and loyalty among consumers, ensuring repeat
business even in the face of intense competition.
Reflecting on our presentation, we found it to be a valuable learning experience
that deepened our understanding of perfect competition and its implications.
Moreover, our discussion sparked awareness of the prevalence of perfect competition
in everyday life, from simple purchases at sari-sari stores to interactions with market
stalls. Despite the abundance of choices available to consumers, the phenomenon of
returning to trusted sellers, often referred to as "suki," underscores the enduring
relationships that can be fostered even within the framework of perfect competition.
Through our discussion, we now have a clearer understanding of how perfect
competition operates and its significance in shaping market behavior and economic
welfare. It is evident that in perfect competition, firms must continuously adapt and
innovate to remain competitive, highlighting the dynamic nature of this market
structure.
Moreover, we also realized the importance of spreading enthusiasm and giving
our best during our presentation. We understood that our goal was not just to deliver
a perfect presentation but to instill knowledge in our classmates positively while
learning and enjoying ourselves in the process.
Looking back, our journey through the complexities of perfect competition
taught us valuable lessons in collaboration, creativity, and dedication. We emerged
with a deeper understanding of economics and a newfound appreciation for the power
of teamwork and enthusiasm in academic pursuits.
