Market Equilibrium and Perfect Competition Dynamics

Equilibrium and Pricing in Economic Balance

Definition of Market Equilibrium

This situation occurs when, in the market, supply equals demand. According to the theories of Adam Smith, the market reaches equilibrium by itself, without the need for state intervention. He also states that the state should not intervene in the economy except to ensure the existence of the market.

Market Operation

Above the equilibrium price, there will be an oversupply, and employers must lower prices to get rid of products. Below the equilibrium price, there will be excess demand, and buyers are willing to pay a higher price to acquire a unit of that good.

Induced Demand and Market Influence

Demand is said to be induced when the offeror influences the applicant. An example is the pharmaceutical market in Japan, where the doctor prescribes and sells medicines to patients in exchange for a profit.

Understanding Perfect Competition

Definition

A market in which companies lack the power to manipulate the market price (price takers), and there is a welfare maximization. This results in an ideal situation for the markets of goods and services, in which the interaction of supply and demand determines the price.

Characteristics of Perfect Competition

• Many producers and consumers: With many small vendors in relation to the market, none can have an appreciable influence on prices; therefore, firms are price takers. A company cannot exorbitantly increase the price of the goods they sell because applicants will take refuge in other bidders.
• Homogeneous product: The buyer is indifferent to one vendor or another; the product of each company is a perfect substitute for those sold by other companies. Another consequence is the absence of brands.
• Available technology: Technology is available to all companies, as factors of production are mobile in the long term.
• Transparency: Companies and consumers have full and free access to information, accepting prices as exogenous. They make decisions by comparing prices because all consumers have the same information about the characteristics of offered prices and quantities of goods.
• Open market: There are no problems entering or leaving the market, nor problems with resale. Any company can enter the market attracted by the existence of high profits.

Existence of Perfect Competitive Markets

These conditions are very strict, and few markets meet them all. However, many are close enough that the perfect competition model remains representative.

Market Balance

In a perfectly competitive market, equilibrium is achieved by meeting market demand (the sum or aggregation of demand for each consumer) and industry supply (the sum or aggregation of the supply of each of the firms operating in that market).

Long-Term Equilibrium

In the long term, perfect competition is a state where supply and demand are exactly the same; i.e., no new firms enter the market, and existing firms have sufficient benefits to continue operating within it.