popular biz reading
Marketing Mix: Promotion
Employee Turnover
Marketing Mix: Price
Planning and Organizing
Maslow's Hierarchy of Needs
Key Performance Indicators
Sustainable Competitive Advantage
Ishikawa Fishbone Diagram
Price Determination
Supply Chain Concept
Employee Induction
3 Basic Finance Statements
Sales Forecast Accuracy
FMCG Sales Boosting
OTIF - On Time In Full
Merchandising at the Point of Sales
Promotion Mix: Advertising
Employee Motivation
Porter's 5 Forces
biz sponsors
BrainCast Relaxation
Advertise on Biz Development
My BrainCast
Energy Booster
biz archive

My Introspective

by Laurus Nobilis
My BrainCast

Strategic Management

Perfect Competition (B)

Perfect Competition









What is the definition of perfect competition? Find out the difference between pure competition and perfect competition.


Posted: Feb 2012


Definition of Perfect Competition

Perfect competition is the situation in the market where the large number of manufacturers and customers of the same product exists.

The price of the product is changing only under the influence of fluctuation of the whole market. No manufacturer is significantly large enough to change the prices in the market.



Pure Competition

The pure competition is the situation where producers and customers have no choice of price or sales or purchase. The price is given by the facts that:

  • There are large number of manufacturers and seller; therefore nobody can influence the price

  • The product is homogeneous, therefore it can be substituted.

  • Geographical distribution of manufacturers and customers does not cause distance preference.



Perfect Competition

The perfect competition is the situation of pure competition, with the additional elements:

  • Full production mobility and freedom of entrance and exit from the sector.

  • Perfect elasticity of production factors supply.

  • Free flow of information enables that every manufacturer and customer is aware about alternative solutions.

  • The same expectations of future trends for all participants in the market.



Profitability of the Company in the Perfect Competition Market

The equilibrium point for the company in the perfect competition market is the point with production level that enables the maximum profit. This is the level of production where marginal revenue equals to marginal cost ( MR = MC ). Since the price is the predefined by the market, the only way of reaching equilibrium point is adjustment of scale of production, in order to meet the point where the profit is largest ( P = TR – TC ).

Perfect Competition graph 1  


There are three typical situations for the company

a) p = MC > AC   
( company makes the profit )

b) p = MC = AC   
( breakeven point – cost coverage )

c) p = MC = AVC 
( closing point )


Perfect Competition graph 2

The precondition for profitability is that the price is higher than average cost ( p = MC > AC ). If the company is in the business with the loss for longer period, it leaves the sector. Reduction of competition ( supply ) is causing the increase of the price. Therefore, the new investment to the sector is attracted.





My BrainCast Self Improvement
blog comments powered by Disqus
My BrainCast My BrainCast energy Booster My Braincast Deep Sleep
My BrainCast Mandala Meditation My BrainCast Relaxation