The basic characteristics of perfectly competitive market are, that several companies operate at the same time (which means no entry and exit barriers) and products are identical. Such competition leads the supply and demand, to determine the price of the product (firm is a price taker). Perfect competition cannot exist, because it demonstrates a perfectly elastic demand curve, for a firm in the market (no change in price whatever units are sold). The curve below shows the graphical demonstration of Perfectly Competitive Market. Perfect competition usually exists in market for unbranded goods usually, such as eatables.

This above figure gives a long run equilibrium position of perfectly competitive market (showing a firm, making normal profit). In case, a firm modifies its product and gains a competitive advantage, it can be abnormally profitable but only in short term, unless the product is copied by the competitors or new entrants are attracted by the product. This brings such changes to the diagram for a short period of time.

Such as if a firm introduces a pen with spy camera video recorder, audio recorder and Usb memory in it. These new features will differentiate it from others products for a small period of time, unless copied or a similar product is introduced by its competitors. The 2nd figure shows the short term abnormal profit earned by a firm for the innovation of that exclusive pen.

Monopoly

Another market system is known as a monopoly. When, in a market, one firm is the only supplier of a certain product, or two large producers agree to sell a product at a certain price (firm becomes price maker), a monopoly occurs. Mergers and takeovers can also result in the formation of monopolies. Monopolies use different methods, such as predatory pricing strategies, to keep the competition at a dead level in the market. To prevent a monopoly from occurring, deregulation takes place. Deregulation reduces barriers of entry for the firms, to enter into a certain market. This is a way through which governments are able to create competition in the markets, to remove monopolies and provide people with low priced goods. The deregulatory authority in the UK is known as “Monopolies and Merger Commission”. Monopoly can also lead to inefficiency, because the producer is not much concerned about the cost of production, since consumer is bound to pay any price charged to them. Sewage disposal is generally a monopoly of local government bodies.