Why Is Perfect Competition Often Described as the Ideal Market Structure? Compare and Contrast with Other Known Market Structures.

Ideal concepts, when implemented into the real world, very often fail to survive. The perfectly competitive market structure is not an exception. The model is based on such strict assumptions that its adaptation into everyday life situations, in most cases, is simply impossible; however it is often described as the ideal. In the long-run, when all the factors of production can vary, given that the maximalisation of earnings is a natural goal behind every firm’s activities, only under the perfectly competitive market’s conditions, is a firm able to reach optimum revenue and, at the same time, be totally efficient. To fully understand this phenomenon it’s necessary to first define productive and allocative efficiency in order to clearly recognize the conditions under which both of them can be achieved. Next, we should focus on how perfect competition differs from monopolistic competition, oligopoly and monopoly. This will allow us to see to what extent a firm’s resources allocation is simply determined by the market structure in which it performs. Such overview will clearly show why in the long-run, in terms of resource allocation, perfect competition is often described as the ideal market structure, and how certain market structures due to their characteristics can prevent the firms from achieving optimum efficiency.

So what makes one firm more efficient than the other? According to Griffiths and Wall, two types of efficiency need to be taken into consideration. First of all, �To achieve productive efficiency(or cost efficiency) a firm must use its resources in such a way as to produce at the lowest possible cost per unit of output. Therefore, productive efficiency is achieved at the lowest point on a firm’s long-run avarage total cost curve. In other words, costs per unit of production in the long run are as low as technically possible’.

Allocative efficiency can be achieved under one condition.�To achieve allocative efficiency it should not be posssible to make someone better off by a reallocation of the resources without, at the same time, making someone worse off.’, �To achieve this situation, one key condition is that price should equal marginal cost.’

However the market structure in which the firm performs, often determines to a great extent its resources allocation, making both of these optimal efficiency criteria, extremely hard to fullfill simultaneusly.

Market structures differ. The most common distinctions are: the number of producers on the market, the level of differentation of the product, access to that market and the possibilities of leaving it for new entrants, as well as the extent to which a company can affect the price for which it sells its output. After applying these criteria, we can divide market structures into: perfect competition, monopolistic competition, oligopoly and monopoly. Due to their strict assumptions, each of them will have different short and long-run equilibrium points, and will therefore greatly affect resource allocation of the performing firms. Knowing these differences is crucial to being able to recognize why it is perfect competition is described as the ideal market structure.

In the perfectly competitive market there are a large numbers of suppliers and buyers, however none of them is big enough to influence either the market price of the good or the general demand for that good. Other suppliers can join the market whenever they want to and the existing ones are able to leave at any time. The good they produce is almost exactly the same as the one of the competition. As a result, together with the assumption that buyers and sellers are in possesion of full information about the market, indvidual demand for each firm is perfectly elastic. The industry sets the price which cannot be influenced by single suppliers(Fig 6.2,a). It is because change in one firm’s production does not sufficiently affect the overall supply, therefore the market price stays the same. Firm’s demand forms a horizontal line which indicates the price, as well as average and marginal revenue curves.(Fig 6.2,b)

It means that each firm can sell an unlimited number of units of production for the same price, and every unit adds the same amount to its total revenue. Therefore firm’s marginal revenue(MR) is equal to its avarage revenue(AR) and the price for which it sells its product(P). In every market structure firm’s resource allocation is determined by the market price of the product and firm’s cost of production. In the short-run, firm’s avarage revenue will need to be at least big enough to cover its avarage variable costs, however the long-run will require covering all the firm’s costs(variable and fixed), including also the normal profit necessary to keep the firm in