Perfect Competition Model Research Proposal Example | Topics and Well Written Essays - 1000 words

Perfect Competition Model - Research Proposal Example Markets become perfectly competitive when they contain all of the following features and fail to be termed as perfectly competitive due to the absence of one or more requirements of the perfect competition model. The steel market may be termed as perfectly competitive as it has all of the following features: The products are homogeneous, i.e. the products are not differentiated from each other in any aspect such as color, scent, packaging etc. Buyers cannot distinguish between products of different producers, that is why there is little or no incentive for firms to spend on advertising or marketing. There is the existence of "Omniscience", i.e. all the buyers, sellers, workers etc. have perfect knowledge of market conditions, whether it be the price charged by all the producers or the wages offered to labor etc. Firms cannot earn supernormal profits in the long run. As there are no barriers to entry, any supernormal profits (earned in the short-run) attracts more suppliers into the industry causing the supply to increase until the point the profit is completely driven off and the industry comes to its equilibrium position. Similarly, in the case of subnormal profits or loss (in the short-run), some firms will leave the industry, shifting the industry's supply curve to the left, raising prices and helps the firm earn normal profits in the long run. FIGURE 1 The likely impact on the profits of steel producers of the rise in the world price of steel from 2002-2004 The likely impact on the steel producers of the rise in the world price of steel is that there was a rise in the revenue earned by steel manufacturers. Since the steel market may be termed as perfectly competitive, there is little that the manufacturers can do to differentiate their product (i.e. steel), however, they can sell there entire output or whatever output they wish to sell at the current market price. As shown in Figure 1, the demand for a company is perfectly elastic, it has to sell whatever output it wants at the current market price only if the company decides to increase its price its demand may fall tenfold or even to zero. Between the period 2002-2004, there was a sharp increase in the demand for steel, at the same time there was also a noticeable increase in the production of steel with China emerging prominently as a large manufacturer and with high demand as well.