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.