Perfect competition is the most appropriate solution to improve the economy as well as the welfare of the people. Because, in a market system like this, supply and demand run in balance. Not to forget also based on a strong inner relationship between producers and consumers.
Unlike the case with the monopoly market, the perfect competition market is a system of buying and selling products that are not affected by any price fluctuations. Therefore, anyone who deals here is generally based on a desire to help others. While the products provided by producers are products that are really needed by most people.
Although these methods and market structures are fairly perfect for creating a mutually beneficial trading climate, in fact not everyone understands what this system really means. Therefore, let us first understand the meaning of the perfectly competitive market, along with their characteristics and characteristics.
The definition of a perfectly competitive market
Perfect competition is a market in which transactions between sellers and buyers take the form of supply and product demand. The difference with the ordinary market is that in this system, transactions carried out are not influenced by any ups and downs in prices.
You need to know, the principle of perfect competition is the agreement between traders and buyers. This arises because there is an inner connection that is closely intertwined because they both already know the price information in the market. Usually, goods sold in this market structure are basic necessities, such as rice, potatoes, sago, and so on.
The characteristics of a perfectly competitive market
Apparently, not all markets can be said to be perfect competition. There must be certain characteristics that must occur in the buying and selling space. The following characteristics are referred to.
- The number of sellers and buyers must be the same
The first characteristic of a perfectly competitive market is that there must be an equal number of sellers and buyers. With these conditions, of course the seller can not arbitrarily play the price. Because, buyers must know information about the original price circulating in the market.
Therefore, no matter how many items are purchased, the price will never change. In this context, the factor that most determines the success of a transaction is the strength of supply and demand for a product.
- The seller and buyer know each other’s price information as detailed as possible
The next perfect competitive market characteristic is that the seller and buyer must know each other about information related to the correct price circulating in the market. This also applies when prices move very quickly.
The purpose of understanding information like this is to prevent the risk of sellers marketing products at prices below market prices due to ignorance. It is also beneficial for consumers not to buy products at prices higher than the actual selling price.
- The types of goods sold are homogeneous
In order to avoid significant differences in price and quality of goods, within the market structure, the products sold must be homogeneous. Thus, even if consumers buy a product from other traders, the price and quality will remain the same. Homogeneous products are products needed by the community but only one category, such as products in the form of staples.
- The seller is free to open and close his business
In a perfectly competitive market system, the seller is given the freedom to open or close his business. If this system is considered detrimental, then the buying and selling activities may be stopped or vice versa.
The characteristics of this one are quite different from other types of markets where usually the seller may only close his business at a certain time. This is usually stated in the agreement before opening a business.
The advantages and disadvantages of a perfectly competitive market
- The advantages of perfect competition
- Opportunities for consumer exploitation are fairly low in perfect competition. This happens because sellers in this market do not have a monopoly price. That way, they don’t have any influence on the price of the product or they can’t overload the consumer more than the normal price.
- Perfect competition is considered more consumer-oriented market. Sellers cannot influence consumers. If that happens, chances are the buyer will move to another seller instantly.
- In this market structure system, there is very little and almost no advertising costs because it has a homogeneous product. Products that can be easily replaced by similar goods from other suppliers, because they are fundamentally of the same quality and physical characteristics as the others.
- Perfect competition does not need to spend a lot of money on advertising. Because the sale will still occur automatically if the company determines a lower price than competitors.
- Lack of perfect competition
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- In the form of a perfectly competitive market, sellers cannot get any motivation to bring innovation or include additional features in the product. This is because the seller cannot be charged additional fees for these additional features. Because, buyers or consumers can easily move to other sellers.
- Location plays a big role in generating a sale. Companies that are located in prime locations tend to get higher sales than those who don’t.
- There are only a few obstacles to enter the perfectly competitive market because any company can enter this market to sell its products. Thus, the number of competitors is likely far more.
Does the structure affect market share?
Know, the type of structure determines a company’s market share. If there is only one type of company in a market, then the company is most likely to control the entire market share. In addition, customer demand is only directed at the company.
However, if we increase the number of companies in two, the market share will also be divided into two. Likewise, if there are about one hundred small companies on the market, the market will be divided proportionally to the hundred companies. For this reason, the market structure clearly influences its market share.
Examples of manifestations of perfect competition
One example of the shape of a perfectly competitive market, for example, you go to the fish market to buy red snapper. There are many fish sellers and buyers. You go to a red snapper and ask for the price per kilogram. Then, the seller answered Rp 48,500.
Next, you go and ask a few other sellers. The price offered is the same for the quantity requested. This is an example of a form of perfect competition.
Under this type of competition, a company can easily influence a product’s price in the market and profit or lose excessively. While in the real world, it is difficult to find concrete forms of perfect competition in any industry model.
However, there are countless industrial models such as cosmetics, telecommunications, cars, and so on where you can find imperfect competition products. Broadly speaking, imperfect competition is a condition which does not always satisfy one or both parties.
Understanding the perfect competitive market and its types
Imperfect competition is usually described as a situation where there are only a few sellers or even single sellers. However, they have massive buyers. This imperfect competition market generally has a single product or no substitute product.
There are many types of markets within imperfect competition market structures. The following explanation.
- Monopoly
The type of monopoly market is usually identical to the existence of a single seller that dominates the entire market. In fact, the price decision is made by one seller who usually only sells one product. Thus, potential competitors are difficult to enter because of the prevailing legal system. One example is the State Electricity Company.
- Monopolistic
Monopolistic competition is usually characterized by the number of sellers offering different products, along with their own characteristics. Among other things, retail companies or packaging product companies.
- Monopsony
Many sellers, but there is only one buyer is a characteristic of monopsony competition. In this case, the buyer can influence the seller’s price. One example of monopsonist market action is the company that provides train cars.
- Oligopoly
This one type of market usually consists of several sellers who are generally more than two and less than ten. They often act in collusion or competition, but have the same product standards. Companies can influence prices, even they can run a cartel system. For example, companies engaged in the sugar and salt industry.
- Oligopsoni
The oligopsonistic market type consists of many sellers and several buyers. A simple example is a motorcycle spare parts company .
A striking difference between perfect and imperfect competition markets
Here are some striking differences between perfect and imperfect competition markets so that you don’t misunderstand them.
- The perfectly competitive market is synonymous with a hypothetical impression whose assumptions are for the most part not concrete in the real world. But on the contrary, imperfect competition is a situation that is quite often found in the real world today.
- There are many market participants in a perfectly competitive market. While the competition market is not perfect it is even more dynamic so that the number of market participants depends on the type of structure.
- The seller is able to produce or supply homogeneous products in a perfectly competitive market. While the competitive market structure is imperfect, marked products offered by sellers can be homogeneous or can also be different.
- There are no barriers to entry and exit in a perfectly competitive market. Unlike the imperfect competition market that seems tight and full of rules, as well as obstacles to entering and entering the market.
- Perfect competition markets are assumed that no company can influence the price of a product. Therefore, they are usually called price takers . However, in an imperfect competition market, companies can be very possible to influence the price of a product or price maker.
Maybe not as simple as you can consider when talking about the difference between a perfectly competitive market and an imperfect competition market. For example, there are many companies that produce similar products for consumers, such as shampoo.
At first, you might have thought that this is a form of perfect competition. However, if you look deeper, this assumption could be wrong. You will find the fact, that all of these products have the same types, but the sellers offer them at different prices.
After understanding the shape or structure of perfect and imperfect competition markets, this is certainly useful both for academics and management. For the management of a business enterprise, knowledge of a structure is a weapon that can be used as a competitor mapping.
From the information given above, you can now understand that a perfectly competitive market is a structure that sounds good to apply. But remember, this market method is not always effective if it is applied to certain commodities. Because, this is related to the advantages and disadvantages discussed earlier.
