In the real sense, no industry is purely competitive since pure competition industries would require the existence of many firms in the industry such that the industry has no market power and perfect substitution is possible. These characteristics are unattainable and unrealistic in the real universe. However, some industries come close to perfect competition such as the agricultural industry. Agricultural products are produced by several individual owned farms across the nation. Farmers, therefore, have little influence over the price of their produce since the market forces determines prices. This implies that if a farmer does not sell at the market price, then their products will not be bought. This results in low-profit margins for the farmers which are mostly constant and averaged around the same amount making it hard for farmers to make supernormal profits. (Pnrjulius, 2016). Therefore, the agriculture industry exhibits characteristics of a purely competitive market as discussed herein.
Pure competition markets refer to those markets where no supplier has power over the market to determine the price of goods. The price is set by the interplay between demand and supply forces making sellers to be price takers. The most that a manufacturer can do in perfect competition is to alter the output or input in the short run depending on the market set price so as to make profits. This market is characterized by a large number of sellers, products that are highly subject to substitution and freedom of entry into and exit from the market. A large number of manufacturers ensures that one manufacturer cannot set the price of the product by rather the market dictates the prices of the goods in regard to supply and demand. In times of high demand, the price shifts upwards slightly while in periods of significant supply the prices move downwards.
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The fluctuations in prices are however significant in the short run. In the long term, the manufacturer will have to make massive changes to increase profits. The products in the pure competition markets can be easily substituted hence the reason why prices do not change much. If sellers raise prices too high, consumers will shift to the supplements’ of the product reducing demand on pure competition market products, and consequently, prices will fall back to normal. Finally, perfect competition markets are free markets thus manufacturers can enter the markets anytime and exit any time and are assumed to have free information whereby the consumers and producers have access to all information required to make the accurate decisions (Reynoids, 2016). All these characteristics are evident in the agricultural industry making it a good example of real competition markets.
Profits are said to be maximized at a point where a firm is operating such that marginal revenue (MR) = marginal product (MP). Profits increase with the increase in the difference between total revenue (TR) and total costs (TC). In perfectly competitive markets, the price is determined by the market so the manufacturer can only increase profits in the short run by shifting either the input or output. This happens by the manufacturer or farmer in the agricultural case deciding what level to produce so as to achieve maximum profits. Hence, sellers’ objective is to determine output level at which marginal costs of production and distribution are equal to the marginal revenue.
From the figure below, the firms achieve maximum profit at E where the MC=MR with a Q1 output level. If the company produces above Q1, it will be operating at a loss per marginal unit. If a competitive firm produces less than Q1, it makes a profit, but the profit is not maximized. Therefore, profit maximization in competitive markets occurs in the short run at MC=MR (Economics help, 2008).
Pnrjulius (2016). Give examples of firms that have a pure competition market structure. ENotes.com. Retrieved on 20 May 2017 from https://www.enotes.com/homework-help/example-firms-that-has-pure-competition-market-593015.
Boundless (2016). Characteristics of Pure Competition. Basic Microeconomics Boundless . Retrieved on 20 May 2017 from https://www.boundless.com/users/233414/textbooks/basic-microeconomics/pure-competition-12/introduction-to-pure-competition-44/characteristics-of-pure-competition-123-14801/.
Pettinger, T. (2011). Profit maximization. Economicshelp.com . Retrieved on 20 May 2017 from http://www.economicshelp.org/blog/3201/economics/profit-maximisation/.
Economics (2008). Short run profit Maximization in perfect competition. Economicsmicro.blogspot.co.ke Retrieved on 201 May 2017 from http://economicsmicro.blogspot.co.ke/2008/11/short-run-profit-maximisation-in.html.