Market Structure Research Paper Example | Topics and Well Written Essays - 2250 words

Market organize - Research Paper ExamplePERFECT COMPETITION Firms operating under correct competition fundamentally rest upon four primary assumptions, the first of which is that since there ar several firms operating under this toughie the significance of their end product from a perspective of the entire industry supply is unimportant which means that such(prenominal) firms do not have the capability to influence the monetary value of the return, therefore, at the market price perfect competition firms are said to experience short elastic demand. Henceforth, this phenomenon postulates that perfect competition firms are price takers (Mankiw, 2011). The second assumption of the archetype of perfect competition relates to the freedom of entry into the industry or whether there is existence of whatever barriers to entry or croak. In this scenario, new firms do not face any lack of restrictions if they wish to enter the industry, however, the concept of freedom of entry is sa id to be applicable in the long-run owing to the period it takes to establish an organization (Sloman, 2006). A fundamental assumption of the model relates to product homogeneity within the industry, this concept is based upon the idea that all businesses supply products that are uniform (Sloman, 2006). Lastly, it is sibylline that buyers and sellers have perfect knowledge regarding the market such as price, quality and costs. The profit maximizing output of the firm occurs at the intersection of Marginal Cost and Marginal Revenue where, MC = MR (Sloman, 2006). Therefore, when P = MC firms in perfect competition are economically efficient, where allocative efficiency occurs when consumer as well as manufacturing business surplus is at its maximum and productive efficiency occurs because the firms vestibular sense output in the long-run is established where the businesses average cost is the least. The quantity of firms in the short run varies as firms forget or come into the ind ustry, if it is understood that the costs of the firms experience no change the exit of some firms lead lead to generation of abnormal profit or supernormal profit where ARAC. In the long-run however, the draw poker of abnormal profits will cause firms to enter the industry because of no barriers to entry or exit thereby, bringing the state of the market back to equilibrium at a point on the LRAC cut down which is the least, causing firms to make normal or zero economic profit such that the long-run equilibrium occurs where P = AR = LRAC = LRMC = MR (Stanlake & Grant, 2000). Due to obvious factors relating to the model of perfect competition it can be cogitate that most firms are not audacious in terms of taking risks. The instability of demand therefore, causes perfectly competitive firms to diversify which leads to intra-industry trade and if the condition of elastic demand is fulfilled such exchange of identical commodities on an international scale proves to be beneficial f or both the countries and firms involved (Cukrowski & Aksen, 2003). Hypothetically, the economic efficiency of perfectly competitive firms would indicate that government regulation is not required in such a model but in the short-run government intervention might be needed to control prices if firms are generating supernormal profits, however, the primary premise remains that in a perfectly competi