Firms In A Perfectly Competitive Industry example essay topic

Brisbane, Australia, is the third largest city; where it serves up some of Australia's best culinary finds. There is a marvellous collection of Brisbane restaurants with everything from stylish boutique eateries featuring top chefs from around the world to local diners than feature Australian specialities (ABC Integra, 2004). This essay will discuss the extent to which restaurants in Brisbane match the characteristic of a perfectly competitive industry both in the short and long run. Following that, this essay will elaborates on the pros and cons from an economic perspective, the characteristics of a perfectly competitive industry. Comparison between perfect competition and monopolistic along with examples will also be given to further illustrate the best market structures that fit restaurants in Brisbane.

It will then be concluded that restaurants in Brisbane does not fit the characteristics of a perfectly competitive industry but rather a monopolistic industry as the only similarity between restaurants and a perfectly competitive industry is the large number of participants involved. Diagram 1.0 - Perfect Competition Perfect competition (as shown above) is a market structure characterised by a large number of small firms, a homogeneous product, and very easy entry into, or exit from, the market (Layton, Robert & Tucker, 2002, p. 173). The characteristic of a large number of small firms is fulfilled when each firm in a market has no significant share of total output and has no ability to affect the product's market price. Each firms work autonomously, rather than coordinating decisions collectively (Layton, Robert & Tucker, 2002, p. 173). Restaurants in Brisbane do not fit this characteristic as restaurants are more fitted under monopolistic competition; exist under a large number of firms where no single firm can influence the market outcome. For example, Michael's Riverside in Brisbane serves some of the area's best seafood (ABC Integra, 2004).

Even so, Michael's unable to influence the market outcome, but is able to set the prices higher than rival restaurants without fear of losing its customers. This is due to product differentiation (Layton, Robert & Tucker, 2002, p. 233). Consumer demand for differentiated products is described using two distinct approaches - the heterogeneous demand and homogeneous demand. The heterogeneous demand assumes that each consumer has a demand for multiple varieties of a product over time and the homogeneous demand assumes that each product consists of a collection of different characteristics such as in location, atmosphere, quality of food, style, services and price (Suranovic, 1997). In a competitive market, all firms produce a standardized or homogeneous product (Layton, Robert & Tucker, p. 173). This means the goods offered by the various sellers are largely identical.

As competition is based solely on the price, and the product is homogeneous, buyers will buy from whoever is cheapest; therefore each producer is required to espouse the least-cost method of production and all excess profits and losses will in the long run be abolished by entry to, or exit from, the industry (Fuller, 1985, p. 69). Firms in a perfectly competitive industry can freely enter or exit the market without any barriers. Barriers can be in form of financial, technical, licenses or permits. Ease of exist from market means that if a firm decides against continuing produce, it can shut down (Layton, Robert & Tucker, 2002, p. 174).

Restaurants in Brisbane do not fit into this characteristic due to barriers as the cost of setting up like renting or owning premises and licensing faced by new entrant. Although firms in a monopolistic ally competitive market do face a low barrier to entry, the firms sell differentiated products, thus causing new firms harder to be established (Layton, Robert & Tucker, 2002, p. 174). For example, Pier Nine Oyster Bar and Seafood Grill in Brisbane is a popular seafood restaurant (ABC Integra, 2004). A new seafood restaurant may have difficulty attracting customers because of Pier's established reputation (Layton, Robert & Tucker, 2002, p. 236). Diagram 2.0 - When new firms enter the restaurant industry, the industry supply curve shift rightward. (McTaggart, Findlay & Parkin, 1999) There are two vital differences between perfect competition and monopolistic competition - excess capacity and mark up marginal cost.

In the long run, as shown in Figure 3.0, there is no excess capacity in perfect competition. Free entry results in competitive firms producing at the point where average total cost is minimise d, is the efficient scale of the firm. For monopolistic competition in the long run, there is excess capacity as the output is less than the efficient scale of perfect competition (South-Western, 2004). The second difference is the mark up marginal cost as shown in Figure 3.1. For a competitive firm, price equal marginal cost.

For a monopolistic ally competitive firm, price exceeds marginal cost, because firm always has some market power (Quayle, Robinson, and McEachern, 1994, p. 222). Figure 3.0 - Excess Capacity (South-Western, 2004) Figure 3.1 - Mark up Marginal Cost (South-Western, 2004) In a perfectly competitive industry, in relation to restaurants in Brisbane, there are advantages and disadvantages associated with it. Consumer surplus (shown in diagram 4.0) measures the benefit to buyers participating in a market. It is a buyer's willingness to pay, and it measures how much the buyer values the good (Gans, King & Mankiw, 2003, p. 134).

This is an advantage of a perfectly competitive industry as consumers are no charged lower (Gans, King & Mankiw, 2003, p. 137). Producer surplus (shown in diagram 5.0) focuses on the benefits seller receives from participating in a market. Cost is the value of everything a seller must give up to produce a good. Producer surplus is the amount a seller is paid minus the cost of production. It measures the benefit of sellers of participating in a market (Gans, King & Mankiw, 2003, p. 140).

This is an advantage as free market allocates the demand of goods to the sellers who can produce them at the least cost (Gans, King, & Mankiw, 2003, p. 146). Another advantage of a perfectly competitive industry is competition. Competition increases efficiency as everyone strives to be the best. Sellers are then more attentive and innovative to consumer's needs. This would lead to a change in demand and thus increases supply (Pindyck and Rubinfield, 1992, p. 284). Diagram 4.0 - How price affects consumer surplus (Gans, King & Mankiw, 2003) Diagram 4.1 - How the price affects producer surplus (Gans, King & Mankiw, 2003) Disadvantages of a perfectly competitive industry are the lack of product variety.

For example, there are many seafood restaurants in Brisbane offering differentiated products that gives consumer a greater choice that if the restaurants are all the same. Consumers would prefer the variety than be faced with no option (Layton, Robert & Tucker, 2002, p. 224). Another disadvantage would be that firms in a perfectly competitive industry may be too small to afford research and development. With the lack of research and development, these firms would lack in technology advancement and lose out to other competitors.

Lastly, the welfare implication and effects of new entry of new firms into the industry will result in price reduction and the economic profit of each existing firm will decreases (McTaggart, Findlay & Parkin, 1999, p. 11.13). Diagram 5.0 - Consumer and Producer Surplus in the market equilibrium (Gans, King & Mankiw, 2003) Diagram 5.1 - The efficiency of the equilibrium (Gans, King & Mankiw, 2003) In conclusion, restaurants in Brisbane do not match the characteristics of a perfectly competitive industry but rather a monopolistic industry. Comparisons between perfect competition and monopolistic competition were made and restaurants were found to be better into monopolistic market structure. Also, from an economic perspective, the advantages and disadvantages or a perfectly competitive industry were argued and compared. It shows that both buyer and seller benefits from consumer and producer surplus. On the whole, restaurants in Brisbane are better fitted in a monopolistic competition industry and do serves some of Australia's best culinary.

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Australia: Thompson. Layton, A., Robinson, T., & Tucker, I. (2002). Economics for today. Australia: Thompson. Pindyck, R., & Rubinfield, D. (1992).

Microeconomics: Second Edition. Singapore: Macmillan Publishing Company. Quayle, M., Robinson, T., & McEachern, W. (1994) Microeconomics: A Contemporary Introduction. Australia: South-Western Publishing Co. South-Western, Monopolistic Competition, viewed 20 April 2005, web S. (1997). Model Assumptions: Monopolistic Competition: International Economics Study Centre, viewed 18 April 2005, web.