Examples of markets in perfect competition are extremely rare. Numerous markets in the retail, service and agricultural sectors approach perfect competition best. But, in the agricultural sector, government support price programs distort the market mechanism. Not withstanding the lack of good examples, this form of market is important because of its
In the milk production segment of agriculture, farms are usuallysmall. They are especially small compared to the size of the entire market for milk. Note that the milk distributors are occasionally large, but not the productive farms.
it is absolutely identical. This is the main distinction between perfect competition and monopolistic competition: once some differences can be recognized by customers, firms acquire
power over these customers.
Milk is a uniform and homogen eous product. It is not possible to make a distinction between the milk of one farm and another. The government has indeed set standards of quality, fat content and cleanliness.
A milk producer who would try to raise his/her revenues by increasing the price for milk, would find the company collecting the milk in that region unwilling to buy his/her milk any longer. One individual farmer is thus unable to affect the price of milk in the entire market.
Agricultural production can start for most crops by simply planting on a parcel of land. For instance, that is true for fruit trees and vegetables. (It is true. however, that for some products such as milk or tobacco, the government limits production because of the existing overproduction).
A single milk producer cannot possibly influence the consumption of milk at large, and needs not advertise. An association of milkproducers or a large milk distributor may, however, be in aposition to use advertisement effectively.
Nationwide, the demand for milk is likely to be downsloping, that is inversely related to price. But for a single milk producer, it is given by the price the farmer can receive: the going market price. It does not change, no matter what quantity the farmer produces. Thus demand is horizontal.
PROFIT MAXIMIZATIONA firm must seek to sell a volume of output where its total revenue exceeds its total cost by the largest amount possible; that is, its profit is the maximum.
the presence of adequate or insufficient resources.
- allocative efficiency, and- productive efficiency.
But there are a few shortcomings nevertheless.
all firms are forced to cut their costs and utilize the best available technology in order to have their minimum average total cost no higher than that of all the other firms in the industry. There is also no under or over utilized capacity.
- provide any correction for income distribution inequity,
- generate any public goods since there is not profit,
- stimulate technological progress because of lack of profits,
- offer diversity in products since these are standardized.