PAPER

Group Task 9

Perfect Competition Market

Arrange by:
Devina Esther Manuela Panggabean / 2307511020
I Kadek Juli Adi Swara / 2307511111

ECONOMIC MAJOR
FACULTY OF ECONOMIC AND BUSINESS
UDAYANA UNIVERSITY
 Perfect Market Competition

Introduction

In Economics, we know a place for people to consume and produce goods and services
is called a market. Market creates supply and demand, demand is how many goods and
services producers can sell to customers, and demand is how much customers need the
goods and services offered by producers. Consumers will usually choose an item that has
high value at the lowest price but The opposite, with producers wanting to sell goods and
services with the lowest possible value at the maximum price. This means that demand
and supply will continue to occur until the midpoint (Equilibrium point) is found, which
is called market occurrence. The existence of producers and consumers is the biggest
factor that determines the value and price of goods or services in the market. When one
of them experiences a problem, there will be no balance between the value and price of
goods and services, for example, if a market has little demand. If there is a lot of corn
offered, the corn has a low value and a low price. On the other hand, if market b has a lot
of demand for corn but a small supply of corn, then the corn will have a high value and
price. According to the example, we know an offer can be worth it when has a high
demand. In a simple sense, a market is a direct meeting between sellers and buyers to
carry out buying and selling transactions. In a broad sense, the market is the total demand
and supply of goods or services. Where producers sell goods or services, and consumers
buy those goods or services provided by the producers. In everyday life, we can see the
market in physical form like a goods market. The origins of the formation of a market in
ancient times began from community habits by using a barter system or exchange system
to exchange goods for currently needed goods. Now the instrument we use for some
transactions is money with some value to determine the price of goods and services. In its
structure, the market has several types, including perfect competition market,
monopolistic competition market, monopoly market, and oligopoly market. In this
discussion, we will focus the topic on the concept of the Perceft Competition Market and
also have some sub-topics about supply and demand and Equilibrium. This is because the
market is considered a market that will guarantee the realization of a production activity
both goods and services optimally and ef�iciently
 Discussion

De�inition

The perfect competition market is the most classic and most market model often used
in economic analysis. This model has been considered a theory and is widely used to
forecast the state of the economy. This model has been discussed since the era of Adam
Smith in his book Wealth of Nations. Edgeworth, in his book Mathematical Physics (1881),
is The �irst person to try to determine the de�inition of perfect competition systematically
and clearly. Then this concept of perfect competition gets a Complete de�inition in Frank's
book Risk, Uncertainty and Pro�it Knight (1921). Sometimes this market structure is
differentiated between the terms "pure competition" perfectly". “Pure” is less than perfect,
rather "perfect". Edward H. Chamberlain (1933) de�ines competition purely as “clean
competition from monopolistic elements.” Condition all that is needed for de�inition is a
large number of sellers and homogeneous (standardized) commodities. George Stigler
(1957) suggests an alternative de�inition by adding conditions, namely information
assumptions perfect. However, one could argue that information Perfect pricing is easier
to obtain in a monopoly market rather than a market consisting of many sellers.

A perfect competition market is a market where the number of sellers and buyers
(consumers) is very large and the products or goods offered are seen or similar. Sellers
whose prices are higher will certainly be abandoned by buyers. This is what encourages
sellers to follow only the prevailing price in the market (price taker). Examples of goods
sold in this form of market are rice, wheat, coal, potatoes, and so on. A perfectly
competitive market is a market where sellers and buyers cannot in�luence prices, so prices
in the market are the result of agreement and interaction between supply and demand.

In a perfectly competitive market, prices are in�luenced by demand, supply, and supply
between sellers and buyers. The buyer gives a request about the nature of the goods to be
purchased, while the seller offers the value of the goods to be sold. The exchange between
the values of the two is one of the price balance.
 Characteristics of Perfect Competition Market

A perfectly competitive market is a structure The market is considered the most ideal
because this market structure guarantees its realization of the most optimal or ef�icient
production activities of goods or services. But In practice, it is not easy to determine the
type of industrial structure the organization is classi�ied as pure perfect competition,
perhaps What exists is approaching the characteristics of a perfectly competitive market
structure. The characteristics of a perfectly competitive market are:

a. Many buyers/companies in the market. Because the number of companies

is very large and relatively small when compared with the amount of internal
production in that industry. Causing an increase or decrease in prices, not even a
little in�luence on the prices prevailing in the market.

b. Sellers and buyers are unable to determine prices. Because so the number
of companies/sellers and buyers in the market, neither can determine or change
market prices. The price of goods at The market is determined by interactions
between all producers and the buyer.

c. Sellers/companies can easily enter/exit to/from the market. If there are

producers who want to carry out activities in an industry within the structure
Perfect competition market, producers can easily carry out activities. On the other
hand, if the seller/company experiences a loss, then he easily leaves the industry.

d. Every producer/company/sales company produces/sells the same

goods (homogeneous). The goods produced by various companies are not easy to
produce differentiated. Buyers cannot tell which one is produced by manufacturer
A or B. Therefore, promotion by advertising will not in�luence product sales.

e. Buyers have perfect knowledge of the situation in the market. Buyers are
aware of the prevailing price levels and changes to them above that price. So
producers cannot sell their goods other prices are higher and at prevailing prices
in the market.

Because in reality perfectly competitive markets generally rarely raise assumptions

from economic analysis regarding the structure of perfect market competition, namely
 1. There are many sellers and buyers. Because there are so many producers
or companies, each manufacturer or company supplies products only a small
portion of the total products offered on the market. There are also so many buyers
that individually they don't have any monopsony power to in�luence mechanisms
in the market.

2. The products produced by producers are homogeneous. A market is

de�ined as a combination of manufacturers that produce products
homogeneous/identical. This means that products from the same manufacturer
as products from other manufacturers are perfect substitutes. Therefore, buyers
cannot differentiate between the products of the manufacturer differently.

3. Every producer is a price taker. The implication of both the above

assumptions is that individual producers cannot affect the prevailing market
price by changing the quantity of a product offered. Thus each producer only
receives market prices. Manufacturers can offer products in any quantity at
market prices.

4. Companies are free to enter and exit the market (free entry and exit
affirms). Any company can enter the market without facing any barriers out of the
market.

5. Maximization of pro�its. The goal of all companies is to maximize pro�its.

There is no other goal.

6. There are no regulations from the government. There is no government

intervention inside the market (such as tariffs, subsidies, production restrictions,
and so on).

A market structure in which the above assumptions have been ful�illed is called a
market pure competition (pure competition). For a perfectly competitive market
competition) requires additional assumptions, namely:

7. Mobility of production factors is perfect. Independent factors of

production move from one company to another through mechanisms economy. In
other words, there is perfect competition in the input market.
 8. Perfect knowledge. All sellers and buyers are assumed to have complete
knowledge of market conditions, both current and future conditions. Thus the
condition of Future uncertainties can be anticipated. Market information can be
easily obtained and without cost.

Thus in a perfectly competitive market, the number of �irms and the capabilities of each
company are considered so small, that it is unable to in�luence the market. In this market,
the forces of demand and supply power can move freely. The prices formed truly re�lect
the desires of producers and consumers. Each buyer and the seller accept the price level
established in the market as a datum or fact that cannot be changed. For the buyer, the
goods or services he buys are a small part of the total amount of public purchases, as well
as for sellers. If the seller lowers the price, then he will make a loss himself, whereas if it
increases the price., buyers will run away from other sellers. Perfect competition market
form, There are many, especially in the �ield of production and trade in products
agricultural products such as rice, wheat, copra, and coconut oil, which are usually sold in
a similar/homogeneous market, such as in the main market. Based on the assumptions
above, analysis can be carried out to equilibrium or balance of producers/companies in
the short term and long term. The producer's equilibrium is reached when his �irm
reaches maximum pro�it. Market or industry equilibrium is achieved when (a) all
companies are in an equilibrium position, and (b) the number of products of all companies
is equal to the total demand of all consumers.

Supply & Demand

In a perfectly competitive market, the forces of supply and demand are inextricably
linked. As prices rise, the supply of goods and services will stimulate demand, resulting in
increased sales volume. Conversely, as prices decrease, the demand for products will
decrease, leading to a corresponding reduction in sales volume. When we run a business,
we aim to make a large pro�it. To achieve this, we may set a high price. However, setting a
high price may lead to a decrease in demand because customers tend to buy more when
the price is reasonable. Therefore, we should strive to set a price that is not only pro�itable
but also attractive to potential customers.
In that case, we can illustrate the curve of supply and demand, like:

Figure 1. Graph of connection Supply and Demand in Industry to Firm

Explanation:

- In Industry curve (a), we can �ind a crossed line providing supply and
demand information. If the demand is too high, then the supply will be low, and
the opposite will happen to demand. If the supply is low, the demand will be
high.
- In Corporate curve (b), shows the relative amount of the company output is
very small compared to the market output. So, whatever the company sells,
prices remain relatively unchanged.

Mathematically the demand and supply curve can be illustrated in the

illustration below:

Figure 2. Graphic of connection �irm with supply and demand in Industry

- Because individual companies act as price takers, the curve of the demand
faced by the company is a horizontal line of P
 - The demand curve (D) is the same as the average revenue curve (AR). with
the marginal revenue curve (MR) and the same price (P).
- The total acceptance curve is a straight line with a positive slope angle,
moving starting from point (0,0).

Equilibrium in the Perfect Competition Market

When we talk about Equilibrium, we need to know how the �irm will work in the short
run and long run. This explanation does not emphasize how long it takes, but how many
factors are constant or changing.

Short-run market Equilibrium

In a perfect competition market, et company is the price taker

thadaptsoptuncertaininlconditionsin by changing the quantity of products. In Shora
companycompony only has one or more �ixed factors, and the only way to change the
output i use fewer factors that can change the shape ofcompany’sony’s cost curve in the
short run, which is relevant t to output decitakess it take.

Two conditions must be met for the company to be in balance:

a. Companies should only produce, at least, when variable costs (VC) are equal to total
revenue (TR), at average variable costs (AVC) are equal to price (P). In this condition, the
company only bears �ixed cost (FC) losses, where these costs with or without production
must still be incurred. However, if the AVC is smaller than the price, the company will no
longer be able to cover the �ixed cost burden. Production activities only add to the burden,
therefore production should be stopped.

b. The company produces at MR MC time so that the company obtains maximum

pro�its or, in bad conditions, the losses are minimal (minimum loss).

In the short term, there are three possibilities in terms of pattern

- company's fortune: Obtaining extraordinary (supernormal) pro�its.

- Experiencing losses, but still able to operate.
- Experiencing losses, where to close the company.
 - Supernormal Pro�its
The company will get supernormal pro�its if the price is higher than the
minimum average cost. in, if the price is at Po the company will make
extraordinary pro�its. This pro�it is achieved when the production quantity is
Qo and the size of the pro�it is the size of the box above. This kind of pro�it will
only be valid in the short term. In the long term, these pro�its will attract the
entry of new companies into the industry.
- Losses but Still Operating
There are two conditions for a company experiencing a loss, namely the
condition that the company can still operate and the condition that the company
must close or dissolve the company. For the �irst condition, it shows the
state stated, namely price is lower than the average total cost but higher than
the average variable cost. A picture like this means that the company obtains
sales results that exceed the variable costs it incurs, but this excess cannot cover
its �ixed costs. In circumstances li,ke this the company will continue its business
because otherwise, it will experience even greater losses, namely as much as the
�ixed costs it incurs.
- Loss Must close.
Meanwhile, the second condition of loss is that the company must close its
business because the sales proceeds cannot cover its production costs, both
�ixed and variable costs. A situation like this will apply if the sales proceeds are
only equal to or less than variable costs.

Long-Run Market Equilibrium

In the long run, a company can reach a point where it earns enough to cover its costs,
which is known as the break-even point. If the company earns more than this, it will attract
more investors, which will eventually lead to competition and lower pro�its. Similarly, if a
company experiences losses, it may lead to many companies leaving the market, which
will eventually lead to a decrease in losses. As a result, in the long term, a company can
only earn a normal pro�it.
 Pro�it Maximization at Equilibrium

A �irm is in equilibrium when it achieves pro�it (pro�it, π) maximum. Pro�it (π) is the
difference or difference between the total cost (TC) and total revenue (TR). Thus it can be
written as follows: π = TR – TC. As discussed in the previous chapter, the company's
equilibrium in the assumption of a perfectly competitive market can be graphically shown
through

two approaches, namely:

(1) Using TR and TC curves

(2) Using MR and MC curves

1. Firm Equilibrium Using TR and TC Curves

In the diagram presented in Figure 3 below, we can see the equilibrium position of
companies using TR and TC curves in competitive markets. The TR curve, which
represents the total revenue, is a straight line that passes through the origin. This indicates
that the price of output remains constant at all levels of output. Manufacturers, in such a
market, have to accept the given price and can sell any output at the prevailing market
price. As a result, the TR increases proportionally to the volume of sales. The marginal
revenue (MR) is the slope of the TR curve, which is constant and equal to the market price
(P). This is because all units of output are sold at the same price. Therefore,
mathematically, it can be expressed as follows:

MR = AR = P = Equilibrium.

To achieve maximum pro�it on the sale of output, the company needs to reach the
equilibrium point where the vertical distance between the TR curve and the TC curve is
the widest.
 -

Figure 3. Equilibrium Condition in Kurva TR dan TC

2. Firm Equilibrium Using MR and MC Curves

In the context of pro�it maximization, it is important to consider the criteria for

marginal revenue, which is the same as marginal cost (MR=MC). In a perfectly
competitive market, the MR for a �irm is equivalent to the price (P). Therefore, the
optimal level of output is reached when P equals MC. The picture below illustrates the
optimal output for a �irm in the short-run, perfectly competitive market.

Figure 4. Pro�it/Equilibrium Maximization Conditions Described by the MR and TMC

Curves.

From the picture above, Q* is the optimal output possible to maximize the company's
pro�it rectangularly area equal to (Pe — ATC) x 0* is the total pro�it of the company.
 When making short-term decisions in a perfectly competitive market, there are a few
key factors to consider. If the price of a good or service (Pe) is greater than the average
variable cost (AVC), then the company can continue operating. In this scenario, even if the
price is lower than the average total cost (ATC), the contribution margin is positive, which
can help reduce costs. On the other hand, if the price is less than the average variable cost,
then the company should be closed. This is because the more the company produces, the
more it will lose. Based on these factors, a company can make informed decisions about
its operations in the short term.

(a) If MC < MR total pro�it is not yet maximum, the company must increase its output.

(b) If MC > MR the level of pro�it decreases, the company must stop production.

(c) If MC = MR the short-run pro�it rate is maximum.

Because it is for companies that are in a competitive market perfect for maximizing
their pro�its they will work to increase sales volume as much as possible.

Cover

Conclusion

A perfectly competitive market is characterized by many sellers and

buyers, homogeneous products, price-taking behavior, easy entry and exit,
perfect knowledge, and no government regulations. In this market structure,
individual �irms do not in�luence the market price and must accept it as a
give.FRMss in the short h run a p perfectly competitive market can experience
supernormal pro�its loss and es but still operate, or losses that lead to
closure. In the long run, �irms can reach a break-even point and earn only
normal pro�its. Equilibrium in a perfectly competitive market can be achieved
through the interaction of supply and demand.
Reference:

Mirman, L. J., Salgueiro, E., & Santugini, M. (2015). Learning in a Perfectly Competitive
Market.

N. Gregory Mankiw, Principles of Economics, 3rd Edition, Cengage Learning Asia,

Singapore 2004

Robert S. Pindyck and Daniel L. Rubinfeld, Mikroekonomi, Jilid 1 dan Jilid 2, Edisi Keenam,
PT.Indeks, Jakarta 2009. [RPR Bab 6,7,8]

Wijaya, T. (2020). Pasar persaingan sempurna dan pasar persaingan tidak sempurna
dalam perspektif islam. PROFIT: Jurnal Kajian Ekonomi dan Perbankan
Syariah, 4(2), 1-16.