British Car Market Essay Example | Topics and Well Written Essays - 1250 words

British Car Market - Essay Example The perfect competition is mere terminology that is used to describe a situation which can be easily comprehended by new learners in Economics. In the real world there is no market that can be classified as being a perfect market. The main idea behind the perfect market is the term "perfect competition". Perfect competition refers to the case where every aspect of competition is known thus giving all information to the market. In a perfect competition, an individual firm is called a price-taker; this is because the market forces decide upon the equilibrium price and quantity. The point that everything is known means that regardless of how much a firm produces it will get the same price throughout its schedule as demand is constant and no one can raise the price or even lower it as the elasticity is 'ZERO' in this case and the addition of each unit in the output brings bout the same change as the previous one. This could be well reflected by the understanding of the Marginal Revenue p rinciple. In the perfect market, demand tends to stay at the same level throughout the schedule so any increment to the cost will only add up to the loss. The main tendency of a perfect market is to produce at the lowest cost possible because price is the only factor which is considered important. In a perfect market, there are a large number of buyers and sellers. This means that the market concentration ratio is very low for each firm which adds to the fact that there would be no effect upon the market if a firm collapses or enters into competition. The addition would only add to the overall output and nothing else and the addition would be of quite a low grain. Product Homogeneity Homogeneity of production is another factor that hinders the classification of the car market as being perfect. In a perfect competition, the products are homogenous that is they have the same attributes as of their substitutes or competitor products. This means that it will not make a difference that which item you buy and from where you buy as long as it matches your description. Since the products are homogenous in the market than quality issues can be raised whereas in a car market one is paying a worthy amount so it is important to have a distinction on what he buys. Cars are also classified as "Status Symbols", keeping this in mind we come to the point that distinction is necessary and thus homogeneity in this market is not acceptable. Entry and Exit Moving ahead we have the case for entry and exit. In a perfect market, every one is free to enter and exit at will. This means that costs are not an issue in this type of problem as free entry and exit means that the costs are low for firms and they can easily switch production among commodities. Further a perfect competition is dominated by small firms this is why the HHI (Herfindahl index) is low for these firms. Imagine that a car producer can switch production easily. SILLY isn't it Yes it is. The machinery required to manufacture a car is very different from that which makes Balloons. In this case if the demand for cars falls so can the producer shift to the Balloon industry in a momentary run Never, it is difficult to shutdown large