Perfect Competition Essay

The market is known as “a group of buyers and sellers of a particular good or service” (Mankiw, 2012, p. 66). Everyone interacts with each other in a market in daily life. In general, markets can be classified into four types which are perfect competition, monopoly, monopolistic competition and oligopoly.

The first type of competition market is perfect competition. Perfect competition has three characteristics. Firstly, it must have “many buyers and sellers in the market, [firms that] can freely enter or exit the market and each [firm] selling an identical product therefore each buyer and seller are price taker[s]” (Mankiw, 2012, p. 280). For example, in the egg market, there have many sellers and buyers, therefore the sellers have no market power to influence the selling price and therefore need to follow the market price. Moreover, the firm’s decision in perfect competition markets can be classified into short-run decisions and long-run decisions. Short-run is defined as a period of time in which each firm has a given plant size and the number of firms in the industry is fixed; while long-run is defined as a period of time in which the quantities of all inputs can be varied. In the short-run’s, firm can decide if they want to continue producing or to shut down the industry, and the quantity to produce if they decide to produce. In the long-run, firms can choose to enter or exit the industry, giving an increase or decrease in its plant size. The advantage of a perfect competition market is that the industry is easy to enter or exit, and that the consumers can buy an identical product for a fair market price; while the disadvantage is that the sellers cannot increase the selling price as they wish. Profit-maximizing output is the ...

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...nsumers can plan and even out their expenditure. This is because oligopoly market has the stable prices (Sonkushre, 2012). A con of oligopoly market is facing the problem of cheating. According to Arnold (2008), some oligopoly firms collude with each other to reduce the quantity of product to increase their product demand. Another con of oligopoly market is the high barrier to enter and exit the market (Arnold, 2008). It provides difficulties for new firms to enter the market.

In conclusion, there are four major types of market structure in economy which are perfect competition, monopolistic, oligopoly and monopoly. They are differentiated by number of sellers and buyers, short run and long run profits and barriers to entry. No market structure is better than the other as they all have their pros and cons. Some may be beneficial to consumers in ways another cannot.