Concept Application Discuss the alternative theories to profit maximisation ranging from perfect competition to strict monopolies

Perfect Competition

Perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. This leads to an outcome which is efficient, according to the economic definition of pareto efficiency The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand. One example of perfect competition in the real world is the agricultural industry, whose large amount of suppliers, relatively inelastic demand and almost perfectly substitutable product makes it a close approximation of the perfect competition model.

A market is said to be one with perfect competition if:

a) There are a large number of small producers and consumers on a given market

b) None of the producers or consumers can influence the price on their own

c) Goods and services are perfect substitutes they are homogeneous

d) All resources (including information) are perfectly mobile

e) Transaction costs are zero

f) The price is determined at the level which equates supply and demand

This model is often criticised as being unrealistic, as in many markets larger producers are more efficient than perfectly competitive smaller producers while transaction costs and information costs can never be zero as they will involve using resources with alternative uses.

English: Long-run equilibrium of a firm under mono...

English: Short-run equilibrium of the firm under m...

Edo Competition LP 640! .EXPLORED

Characteristics of a Monopolistically Competitive Industry

Monopolistic Competitive industry is described as "A market structure in which many firms sell a differentiated product into which entry is relatively easy in which the firm has some control over its product price and in which there is considerable non-price competition".(1)

There are four characteristics of monopolistic competition these are:

a) There are many sellers in this industry creating lots of competition

b) It's easy for firms to enter this industry and for existing firms to exit

c) Firms in this industry sell differentiated products...