In pure competition, the firm has to accept the given market price. At this given price, it can sell all the products, which it desires but at any higher price, it cannot sell anything. If the market price is below its cost, it has to either take the loss or withdraw from the market. As a result, any single firm in a purely competitive situation has to adjust its production and sales policies to the given market price. However, the market prices arc determined through the mutual consent of all the individual competitive buyers and sellers together. But any individual firm has no control over the price. Since a purely competitive seller has no control over the price at which he sells, his average marginal revenue schedule is infinitely elastic. In perfect competition, marginal revenue is equal to the average revenue, because every unit is sold at the same market price, irrespective of the quantity sold. Graphically, a horizontal line at the market price represents it. As expansion of sales does not require any reduction in the price at all; the greater the quantity sold, the larger is the revenue. Under ordinary circumstances, the owner of a firm will not question whether to produce or not to produce. Rather he will have to decide whether it will be better to produce, say, X units or Y units. In order to answer this question, he will compare the incremental cost and the incremental revenue resulting from the alternative courses of action. To express in technical terms, the maximum profit (or the minimum loss) position can be attained by increasing output so long as the marginal revenue continues to exceed the marginal cost. When marginal cost is above the marginal revenue, an increase in output would reduce profits and it would be better to decrease the output. If the amount of marginal revenue is greater than the marginal cost, it would be beneficial to increase the output. Thus, profit is maximized or the loss is minimized by increasing the output just up to the point at which marginal cost equals marginal revenue.
Characteristics of Pure Competition
There are few characteristic of pure competition. One of the characteristic is large number of small sellers in this market. Therefore, the action of any single seller does not have a significant effect on other sellers in the market. Also, it is assumed that many buyers and resources (particularly capital) can easily be transferred into and out of the industry. Secondly, there is no product differentiation in pure competition concept. All firm sell identical products. In other words, all products are completely standardized product in this concept. There are numerous firms in pure competition; each one is so small a part of the market that it cannot alter the market price by selling a little more or little less of its own output. Thirdly, pure competition has been used to refer to markets in which firms are price takers historically. Any firm in a market will be price takers accordance to four conditions;
- All of firm in the market are producing an identical produce;
- There a large number of firms exist in the market;
- Each firm supplies only a very small portion of the total amount supplied to the market;
- No barriers limit in the entry or exit in the market.
Consequences of Pure Competition
The consequences of pure competition can be enlisted as follows:
- If the market price is below the cost of production of a particular producer he can do nothing but to take a loss (in the short run). If the price remains below his cost of production for a sufficiently long period, he has no alternative but to go out of business.
- A firm can increase its profits by selling more units.
- Products subject to a competitive market situation, face a greater degree of price instability than is the case with differentiated products.
- No useful purpose is served by advertising. When products sold by individual sellers are identical, advertising by anyone seller would have a negligible effect on the demand for his product.