MERITS OF PERFECT COMPETITION

MERITS OF PERFECT COMPETITION

 

                i.            OPTIMUM USE OF RESOURCES: The producer can attain a least cost combination of factors of production and thus can afford to keep price of the product as low as possible. In aggregate for the nation, resources can be optimally utilized.

              ii.            PRODUCTION OF CHEAPER AND BETTER QUALITY PRODUCTS: By attaining a least cost combination the producer can sell the products at a reasonably low rate and the better quality as he can afford to use modern technique and technologies.

            iii.            ENCOURAGEMENT OF INVENTIONS AND INNOVATIONS: New inventions in production will generally reduce cost of production. Factors are used optimally and with innovations the consumer will have better quality products, hence profit is increased with lower cost production.

            iv.            REDUCTION IN UNEMPLOYMENT: This kind of competition will lead to the establishment of many new firms. Basically, for a firm to run it needs labourers. Therefore, the problem of and the producer gain maximum profit.

              v.            EQUAL DISTRIBUTION OF WEALTH:

     This means that marginal productivity of each will be equal to one another and at the same time marginal time product of each factor is equal to its cost. By attaining these features, wealth can be distributed equally among the whole nation.

DEMERITS OF PERFECT COMPETITION

                                        i.            WASTAGE OF DOMESTIC RESOURCES: This is in case of loss due to numerous firms producing the same product. A number of firms will close down due to the fact that they cannot cope with the competition. Hence, this means that all the resources that were being used are wasted.

                                      ii.            NO INTERNAL AND EXTERNAL ECONOMIES: Cost reducing and out maximizing benefits which accrue to a firm internally will not be obtained in the expanding itself in the perfect market.

                                    iii.            Fluctuation of price: This occurs in the short run only e.g., when the market price for a certain product is quite high. It encourages new firms to enter the industry. When this happens, the price of the product will decrease as supply is abundant due to many firms producing it and attaining a least cost combination of production. After some time some firms pull out of the industry due to tough competition. Thus the price of the product goes up again. Hence, there is a fluctuation of price.

                                     iv.            IGNORANCE OF PUBLIC WELFARE IN CERTAIN SECTORS OF THE ECONOMY: Take the case of electricity, numerous firms may be using the same method of production and distribution. This would mean that the wiring will be all over the places and hence it is hazardous to the welfare of the community. If the government takes over, it would enunciate a better approach e.g. underground cable which is much safer for the people. therefore, the fact is that in perfect competition producing electricity does not promote the welfare of the nation.

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IMPERFECT COMPETITION

IMPERFECT COMPETITION

              The main reason for competition to prevail in the market is to achieve an optimum price in favor of both buyer and seller. However, under imperfect competition price of a product does not become optimum as to how imperfect competition comes into existence.

1)      PRODUCT DIFFERENTIATION: Basically the products are of the same kind but more often than not in order to promote sale of the product, the producer modifies the product by presentation with different labels, colours and other attractions e.g. different kinds of soap, tooth-pastes, blades etc.

2)      SMALL NUMBER OF BUYERS AND SELLERS: This means that there are only a small number of sellers. Due to this fact each seller plays a dominant role in ensuring the prince policy and can also influence his rivals. Each seller cannot afford to neglect the other for fear of possible adverse price changes by the other seller being small in number, hence in a way, force the buyers to meet their demand.

3)      IMPERFECT KNOWLEDGE OF THE MARKET: This would cause chaos. Buyers will be paying unnecessarily for a product which can be obtained at a lower price in another place, or the buyers may not even be getting the initial amount of that product in an perfect market. Sellers will again benefit from this by increasing prices of product at their will applying the amount of the product they wish and not as in a perfect market.

4)      BARRIERS TO EXIT AND ENTRY OF FIRMS IN THE INDUSTRY: There are two main barriers i.e. natural and artificial. Natural barriers are those which cannot be overcome where a country has complete control over the production of a certain product and no generally implemented by producers in order to enhance their sales e.g. labeling, advertising etc. of the same products.

5)      IMPERFECT MOBILITY OF FACTORS PRODUCTION: This would result in the producer losing out. His or her optimum cost of production will not be achieved. Cost of production will increase, leading to wastage of capital. Here, supply may exceed demand and thus price will fall sharply.

6)      FORCES OF DEMAND AND SUPPLY DO NOT OPERATE FREELY: As mentioned earlier, restriction of the demand of a product will naturally lead to a monopolistic situation and if supply were restricted, price of the products would fluctuate ( however, this is only in the short run).

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KINDS OF MARKETS ACCORDING TO COMPETITION

KINDS OF MARKETS ACCORDING TO COMPETITION

      (A) PERFECT COMPETITION

      (B) IMPERFECT COMPETITION

(A) PERFECT COMPETITION

     In order for Perfect competition to prevail in the market, the following six pre-conditions have to be satisfied.

1.      Homogeneous products: This means that the products are to be perfectly identical substitutes for one another. Under price competition the consumers accept the product being produced by numerous firm as to be the same. Being perfect substitutes for one another, it results in cross elasticity being identify. This also means that their prices are practically equal. Therefore, if a seller raises the price of his product even by Re. 1, he will lose all his customers.

2.      Large number of buyers and sellers: Another characteristic of pure/perfect competition is the existence of a large number of buyers and sellers in the market. This means no individual buyer or seller will be able to curtail the market price, due to the fact that the output of a single firm is only a small proportion of the total output and total demand. “thus, the market price is a parameter to be acted to and not a variable to be determined.”

3.      Free exit or entry of firms in the industry: If this condition was to be met, all firms in the industry would be earning normal profits. If suddenly the profit becomes more than normal, it will result in new firms joining in and thus extra profit will diminish. Then again, if profit were to decline, it would result in the exit of a few firms and thus the remaining firms will benefit from this in the sense that profit returns to its normal situation. However, if there were to be restrictions on entry of new firms, existing firms will obtain enormous profit.

4.      Perfect knowledge of the market: buyers as well as sellers must have perfect knowledge of the market. Both must take into account the prevailing price in the market. Ignorance of this fact will lead to buyers paying unnecessarily and demanding unusual amounts of a product and the seller will tend to charge high prices and giving less than the usual amount necessitated.

5.      Free mobility of factors of production: the producer must always maintain an equilibrium position in production. forces of demand and supply determine this factor, e.g., if supply exceeds demand, a few factors have to reduce their output and if it were to be vice-versa, then additional factors would have to be brought in to compensate for the declining ones

6.      Free operation of demand and supply: The forces, demand and supply, cannot and must not be restricted, e.g., in the case of demand for a product, a consumer must not restrict himself to a typical product. Just for the sake of patriotic influence etc. A consumer must not be restricted or even overloaded as the price of a product depends on it and a product cannot simply become expensive due to the fact the producer suspends further supply. 

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KINDS OF MARKET ACCORDING TO COMMODITIES

KINDS OF MARKET ACCORDING TO COMMODITIES

This market deals with various commodities which we shall mention in the following sub-headings.

1)      GENERAL MARKET: As the name implies, this type of market deals with general commodities that are daily use, e.g. the provision stores. Here, we can purchase goods such a food items and beverages, stationary, toiletries etc.

2)      SPECIALIZED MARKET: This market only deals with specific products. Only one particular kind of product is sold, and can be purchased here. This kind of market thoroughly specializes in that particular production e.g. pharmacies, electrical shops etc.

3)      CAPITAL MARKET: The capital deals with long-term (monetary) dealings/ transactions. The main function of this market is to deal with the scale and purchase of new securities for the country in general e.g. new bonds, stock, shares etc.

4)      STOCK EXCHANGE: The stock exchange is concerned with short term monetary transactions. It deals the sale and purchase of old bonds and old shares that are being speculated.

5)      FACTOR MARKET: This market deals with the demand for and supply of the factor of production. For example in the case of land. The function of this market is to deal with the sale and purchase of land e.g. those who wish to buy a place of land to build a house on etc. will first have to go through this factor market. Similarly in the case of labour. This factor market deal with the demand and supply of labour. In this case mobility of labour, division etc., is dealt with by the factor market. in the case of capital, this market deals with anything that as to do with money e.g., mobility of capital etc. whereas in the case of entrepreneur. The market deals with cases when a particular firm decides to change its industry due to various reasons.

6)      MONEY MARKET: This type of market deals with financial transaction on a short term basis e.g. if a person decides to open a store or a group of consultants decide to run a firm, the would first have to accumulate money capital. They can do this buy obtaining loans on a short term basis from the money market e.g., commercial banks.

7)      FOREIGN EXCHANGE MARKET: This market plays adominant role in anything to do with foreign exchange. It deals with matters regarding the sale and purchase of foreign exchange, or in other words it deals with foreign exchange on an open demand and supply basis.

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DIFFERENT KINDS OF MARKET

DIFFERENT KINDS OF MARKET

        Generally market can be divided into four types. These kinds of markets are according to the following:

1)      TIME

2)      SPACE

3)      COMMODITIES

4)      COMPETITION

(i) EXPLANATION OF MARKET ACCORDING TO TIME: Market can be classified into three main categories according to time.

        i.            Very short period market.

      ii.            Short period market.

    iii.            Long period market.

(1) VERY SHORT PERIOD MARKET:  this type of market usually deals with the sale and purchase of perishable commodities e.g. agriculture products. In this particular case the products or the demand for them is said to be relatively elastic, as a small change in price leads to a big change in the demand for them. In very short period market e.g. weekly bazaar etc. the supply of products remains fixed and in this case, demand plays the dominant role in determining the price.

(9) SHORT PERIOD MARKET: A short period market is one that exists for a few months approximately. In this due to the fact that all factors of production are variable. Supply can be increased by the firms e.g. by increasing the number f shifts etc. and this case both demand and supply play their role to determine the price. Supply is inelastic i.e. supply is less than unity.

(3) LONG PERIOD: In the long period market the prices of the products generally do not change much. This is due to the fact that all factors of production are variable. Hence, supply is elastic and is greater than unity. Supply of the products can be adjusted in accordance with the demand for them. Therefore, prices are generally stable.

(ii) KINDS OF MARKETS ACCORDING TO SPACE: This kind of market can be broken in four categories:

1)      Local market.

2)      Regional market.

3)      National market.

4)      International market.

(1) Local market: An example of this type of market is the one which prevails in rural areas. This type of market works in a small capacity and does not get involved with major marketing firms e.g. provision stores selling varieties of commodities in various amounts as required by each consumer. The prices of the products sold here are quit flexible, so the buyer and seller have a better understanding. This type of market can also prevail in urban areas.

(2) REGIONAL MARKET: It is a market that prevails in a region. For example, in Pakistan we have four provinces which are also known as regions. Here, consumer goods and services are sold at prices which are standardized.

(3) NATIONAL MARKET:  In the market commodities are supplied in accordance with the demand of the consumer throughout the whole country. An example is a market which is involved in distributing agriculture products, e.g. wheat market in Pakistan.

(4) INTERNATIONAL MARKET: This type of market is usually related with large scale production. the supply of the product is shared by various countries of the world. Nationally the supply of these products is monopolized by one or a number of countries e.g. in the case of oil countries like Saudi Arabia, Kuwait and other Middle East countries can determine the optimum prices of the products. However, the prices of these products are not stable in the sense that they depend on many other factors like political stability, discovery of substitutes etc.

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MARKET

MARKET

WHAT DO WE UNDERSTAND NY THE TERM MARKET?

              Economists have defined market as an area where buyers and sellers, come in contact with each; other by any means of communication in order to determine the price of a product through the farces of demand and supply. Market area is not restricted. It can be the smallest area e.g. a village, or the largest area e.g. the international area in marketing.

MEANING OF MARKET:

     “Originally”, Says Jevons, “a market was a public place in town where provisions and other objects weie exposed for sale; but the word has been generalized so as to mean any body of persons who are in intimate business relations and carry on extensive transaction in any commodity. A great city may contain as many markets as there are important branches of trade, and these markets many or may not be localized……. But the idea of locality is not necessary. The trader may be spread over a whole town, or region, or a country and yet from a market, if they are, by means of fairs, meetings, published prices lists, the post-office or otherwise, in close communication with each other”.
        In the words of Cournot, a French economist, “Economists understand by the term market not any particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of the same goods tends to equality easily and quickly.”
      Thus, the essentials of a market are:
a) A commodity which is dealt with;
b) The existence of buyers and sellers;
c) A place, be it a certain region, a country or the entire world;
d) Such intercourse between buyers and sellers that only one price should prevail for the same commodity at the same time.
OR

DEFFINATION OF MARKET:

 A collection of homogeneous transactions. A market is created whenever potential sellers of a good or service are brought into contact with potential buyers and means of exchange is available. The medium of exchange may be money or barter. Exchange agreement are reached through the operation of the laws of supply and demand, in traditional economics (Marshall, A) a market is characterized by a single prevailing price for commodities of uniform quality (law of one price). This is not necessarily the same as the business view – the market is a collection of selling opportunities; or the legal view; where the market is a trading zone free of artificial restriction on transaction. Price system; single market

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DIFFERENCE BETWEEN SUPPLY AND STOCK

SUPPLY

     Supply is the quantity of output brought for sale in the market at a certain price, e.g. supply of rice is 1000 kg and is being sold in the market at Rs. 40 per kg.

DIFFERENCE BETWEEN SUPPLY AND STOCK:

    Stock is the quantity of output which a seller/business has with him and has not yet been brought for sale: where supply is the quantity of output brought from the existing stock of sale at a certain price in the market.

e.g.   (i) stock = 1000 kg of rice

        (ii) supply = 200 kg for sale at Rs. 40 per kg.

SUPPLY AND RESERVE PRICE:

         Reserve price is the “secret price” know only to the seller or businessman below which he will not be prepared to sell under in circumstances. In other words, we can call it a limit, and the seller will not settle for less than this. No matter what the situation maybe, the seller will not reduce the price of the commodity lower than the reserve price.

DETERMINATIONS OF RESERVE PRICE:

        i.            NATURE OF THE PRODUCT: in case of perishable products, e.g. food etc. the reserve price has got to be low. This is because that they must be disposed of quickly. However, in case of durable products, e.g. electrical goods etc. the reserve price cam be high, because their supply can be stocked up.

      ii.            EXPENDITURE OF STOCK:  sometime, the producer has own warehouse to keep his stock. But there are time when he might have to get one on rent to keep his stock. Therefore, he has to incur some expenditure on his stock.

          In the former case, his stock of durable goods will enable him to put his reserve price high.

    iii.            FUTURE PRICE: If the producer feels that the price of his product will achieve a higher level in the future, he will put his reserve price actually high and vice-versa, so as to get as much profit as possible.

    iv.            COST OF PRODUCTION:  If the marginal cost of production is high, the average cost will be high and therefore, the price of the product will also be high. In order to avoid a great final loss, the producer will keep the reserve price high and vice-versa.

      v.            Liquidity preference: if the producer decides that he needs money quickly for one reason or the other, he will keep the reserve price low as this enable him to dispose off the stock quickly and vice-versa.

    vi.            ARRIVAL OF FRESH SUPPLY: If the arrival of fresh supply is expected quickly, e,g. agricultural products, the reserve price has got to be low, and in case of durable goods, it is generally high.

  vii.            MARKET SITUATION: If there were to be competition among the producers in the market as to who would be able to sell more, then the reserve price will be low. However, if there were to be monopoly, naturally, the reserve price would be high because consumers would have no other alternative.

LAW OF SUPPLY:

            The law of supply states that, other factors remaining constant, when the price of a particular commodity rises, its quantitative supply (Qs) I,e. the quantity supplied for sale, also rises and vice-versa. In short, Qs = f (p).

Price per kg (Rs)	Quantity supplied (kg)
4	40
8	80
12	120
16	160

   supply curve

           From the table and diagram we can see how the law of supply operates. When the price of the commodity is Rs.4 quantitative supply of it will be 40 kg. as the price gradually increases until it quantity supplied also increases to 160 kg. as the price gradually increases that…. As price goes up, Qs. Also goes up.

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MONOPOLY THEORY OF PROFITS

MONOPOLY THEORY OF PROFITS

               There is no doubt that profits arise from dynamic changes, innovations and from making a correct estimates of future economic conditions. Another view point of profit is that monopolistic and monopolistic competition in the market also give rise to profits, the firms under monopoly or monopolistic competition have great control over the price of the product. They are the price makers rather than the price takers. As such they raise prices by restricting the level of output and thus keep profit at higher level. Monopoly power, thus, is the basic sources of business profits.

          This Kalocki’s theory of monopoly profits has also been criticized. It is said that monopoly is no doubt an important cause and source of monopoly profits but it does not replace other theories. Monopoly power only supplements other theories.

CONCLUSION:

                 After discussing various theories of determination of profits, we come to this conclusion that all these theories are defective in one way or the other. The basic defect with these theories is that they particularize certain aspects of the function of an entrepreneur to the neglect of others, while the fact is that his functions are many-aid varied. The profit can arise due to monopolistic position of the entrepreneur or adoption of innovation or sheer chance or some of the factors stated above.

        Thus, we conclude that there is not a single theory of profit which gives as correct and comprehensive explanation of the nature and determination of the profits. Such a theory is yet to be propounded.

SHOULD PROFITS BE CONTROLLED

      If we look at profit from socialists point of view, we find that they believe in the abolition of profits. According to socialists, the value of the commodity is determined by the quantity of labour expended during its production. as all value is due to labour, so it must go to him and not to the entrepreneur. If the entrepreneur takes away something from the share of the labour, that is legalized robbery.

       In our opinion, if the entrepreneur is earning normal or abnormal profits by superfluous means, then they must be checked for instance, if an entrepreneur is paying less to the labour then their marginal net product or is bribing the legislature for passing tariffs legislation or is selling the goods in black market in order to maximize the difference between the total receipts and the total costs of production, then every sane person will condemn this behavior of the entrepreneur and will regard these profits as unjustified. Similarly, if an entrepreneur due to his monopolistic position charges too high price for his products and thus fleeces the customers, then that kind of profits can also not be defended and so they should be controlled.

         But if a businessman is earning just normal profits by honest means, then they can be justified in very respect. Profits are an incentive to the entrepreneur for undertaking, coordinating, directing and bearing the risks in a business. If the entrepreneur is not duly rewarded for the role which he performs in the process of production activities will come to a standstill. Profit are the payment for the services of an entrepreneur in production and so they must be paid to him. We thus, conclude that profits which an entrepreneur earns by unlawful means should altogether be monopolistic position or by sheer chances should be controlled and the normal profits which service as an incentive payment to the entrepreneur must remain in the business so that the productive of the economic organization may progress.

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DYNAMIC THEORY OF PROFIT

DYNAMIC THEORY OF PROFIT

        In the world of reality, according to J.B larks, profit arises only in a dynamic economy. An economy is said to be dynamic when there is a change in the population growth or a change in the method of production or a change in the consumer wants, etc. a society which is without these changes is called a static society. in a static society only monopoly profits continue to exist all other economic profit are gradually eliminated by competition.

    In a dynamic society, an entrepreneur is always confronted with continuous unpredictable changes in demand for his product the variation in demand may take place due to change in fashions, tastes, standard of living, distribution of income, population, new inventions, international repercussion and technological advance, etc. A prudent entrepreneur will always keep an eye on the future demand for his products. If he succeeds in increasing his sale by lowering the cost of production or by adoption of an innovation, then he can secure profits. Thus, we find, that profit are a reward, of progress. Schumpeter calls it the reward of innovation. In dynamic economy, if an entrepreneur produces a new thing and creates demand for his products, then he is likely to obtain bi profits. But the profit of the entrepreneur cannot continue to exist for long period. The other entrepreneurs also adopt the innovation and produce similar products. As total output increases, the profits, gradually come down. Thus, we find that perpetual profit profits are the result of perpetual new successful innovations.

CRITICISM:

        Prof. Knight has criticized the Clarkian theory of profit on the ground that it is wrong to attribute all profits to dynamic changes. According to him, there are certain changes which are of a recurring and calculable nature. They can be anticipated and the output can be adjusted according to that. The profits do not arise on those regular changes but on those which are unforeseen or unpredictable. He thus observes that “it is not dynamic changes nor any changes as such which cause profits but the divergence of actual conditions form those which have been expected and on the basis of which business arrangements have been made.

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