In this piece of coursework I will be discussing how people tend to purchase stocks when the market is growing and how they generally sell them off when the stock market depreciates. In addition to this I will be demonstrating how perfect competition is always in the consumers best interests. As well as this I shall be exemplifying why average costs are U shaped in terms of the short/long run.Perfect competition is a market structure that allows many businesses to offer a homogenous product, meaning that they are all identical. This market structure is generally used as a benchmarking tool against other real life market structures. This is because they have the freedom of entry and exit (no barriers) regarding to perfect information about pricing and supply.
Businesses will use this to make steady profits as well as keeping prices low due to competitive pressures. All firms are price takers meaning that not one buyer or seller can influence the set market price by any considerable action as they only have a small minority of the market share, this means that if a single firm was to independently increase its price then they will not sell any goods whatsoever. As well as this all consumers are able to obtain complete information on the product being sold including the prices charged by each firm. Using perfect competition means that there is absolutely no need for government regulation unless it was to make the market more competitive. Using this theoretical market structure will allow firms to make normal profits in the long run but can allow them to make abnormal profits in the short run. Perfect competition can also be referred to as pure competition. (Sloman, 2003, p. 150)Perfect competition involves short run and long run applications.
During the short run in terms of perfect competition there is not enough time for new entrants to enter the market, this means that the number of firms in the market stays the exact same. This will majorly depend on the firms’ costs and revenue. In the short run the contact between demand and supply decides the market clearing price. However in the long run if a lot of firms are making increased profits during the short run it will encourage new entrants to enter the market this is because there are no barriers to entry as discusses earlier. This would cause a noticeable shift in market supply which will have an impact on pricing forcing it to decrease until all super-normal profits are drained.
This would cause firms to be making losses and since there are no barriers to exit they may decide to leave the market, this will cause a shift in the supply industry which will then help raise prices to enable those who remained in the market to thrive and develop normalised profits. (Sloman, 2003, p. 150)Perfect competition can be seen as always being the consumers best interests, this is because the pricing is very low and the risk of consumer exploitation is very low, this is because firms do not have any monopoly pricing power meaning they will not be able to influence the pricing of a product such as charging higher than the usual price. Another advantage to the consumer would be that consumers are able to manipulate the market by changing trends which will lead to firms having to respond to this as well as increasing their customer demand. This will force firms to increase on supply to increase short run profits. This relates to customer dominance on how a situation forces a firm to respond to changes to consumer demand without being in a position to change it in the long run due to its average costs. As well as this perfect competition is a consumer based market meaning that firms can’t afford to displease their consumers as they can easily move to a different seller and provide business for them. This is why perfect competition aims to please the consumer as if they feel displeased with the seller they can take their business elsewhere.
(Sloman, 2003, p. 158)However with benefits there are usually some drawbacks, in this instance there is no incentive for firms to innovate or to add more features to the already existing product because the profit margin is fixed, if a firm was to add features to an existing product this would cost them more to manufacture meaning they would have to increase prices to remain at the same profit margin but the fact that they can’t charge a higher than normal price means that it would be meaningless, therefore sellers keep selling standardized products at the fixed market price to focus of supply and demand. Another drawback of perfect competition would be that there are no barriers to entry, because of this any firm will be able to enter the market at any given time and start selling the exact same product, because of this factor existing firms cannot afford to become complacent as the chances of losing their market share to new entrants will always be a risk.To conclude, it is clear that perfect competition is always in the consumers’ best interest as they play such a vital role in said market. There is a remarkable factor that is the extremely low prices that consumers can purchase products or services for.
As well as this there are more benefits than drawbacks for consumers when considering perfect competition which means it will always be in the consumers favour. The whole aspect of perfect competition revolves around consumers, this means that consumers hold the most power over firms.