A Discussion on Perfect and Pure Competition of Market

Perfect Competition can be categorized as:

Large number of buyers and sellers:

A market runs on large number of buyers and sellers. Single firm is not able to affect the market supply or the market price. Similarly, there are large numbers of buyers also in market. Even the buyers can’t influence the price by changing their demand because each buyer and seller is like a drop in the ocean.

Homogeneous product:

Homogeneous product is known as the most important feature. According to it, product, which these large number of buyers buy from large number of sellers are identical or we can say perfect substitute. That means if one buyer increase the price, the buyer will buy it from other sellers as the products are identical e.g. rice.

Free entry and exit of firms:

We can take an example to clarify the term. An entrepreneur, who has enough capital and still can start the business and enter the industry and any one who is incurring loss can stop the production and exit the industry.

Firms are price takers:

If there are many buyers and sellers, nobody can influence the price or the supply in the industry. They are just like the drop in the ocean.

No cost of transportation:

In the perfect competition it is assumed that cost of transportation does not exist.

Now we should talk about perfect and pure competition. Perfect competition has all the features of pure competition and some more features. The first three features given under perfect competition constitutes pure competition whereas perfect competition has the features of pure competition and two more features they are perfect knowledge about the market and perfect mobility of inputs and output. Market of competition comes through profit maximization concept.

Property market also runs on the same concept of perfect and pure competition in the modern market. Now, market is not a place where we sell or buy a thing. Now, market is services also where third party takes an entry such as – finance market, property market etc.

Profit Maximization Model and Theory for Market

Profit maximization is the rational behaviour of equilibrium assumption. Any firm which aiming at profit maximization model; will go increasing its output till it reaches maximum profit output. Profit is known nothing but differences between total revenue and total cost. The more the differences between total revenue and total cost will create maximum profit. So, the equilibrium for a firm will be when there is maximum difference between the total cost and total revenue.

Economist Theory of Firm:

According to the Economist Theory of Firm, a firm is a transformation unit, which converts input into output and while doing so, tries to create surplus value. This surplus value is nothing but the difference between the value of the product and the value of the factors of production. The firm aiming for profit maximization reaches its equilibrium only when it produces profit maximizing output. The firm maximizes profit by equating marginal revenue with marginal cost.

Behavioral Theory of Cyert & March:

According to the theory, in a large multi-product firm the management is not the owner. There are forms of business firm which compromises the group of individuals and not controlled by single entity.

Marris Growth Maximization Model:

Robin Marris is the developer of the model. According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price.

Sales Maximization Model:

This is alternative model for profit maximization model. The model has been propounded by W.J. Baumol who was an American Economist. The assumption in this theory is relation about business behaviour. Baumol thinks managers are more interested in maximizing sales rather than profit.

Williamson’s Managerial Discretionary Theory:

According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries to get maximum returns on investment and get maximum profit, whereas managers try to maximize profit in their satisfying function.

At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this theory, the firm will try to get maximum returns or maximum profit where as manager try to maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.