ACCA BT Syllabus A. The Business Organisation And Its External Environment - Perfect, Imperfect and Monopolistic Markets - Notes ^{4 / 4}

Perfect competition is characterised by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. 

Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.

Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any influence.

For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.

Imperfect competition is when a firm has too much control over the market of a particular good or service and can therefore charge more than its real market value.

When the market for a certain good or service does not have a lot of competitors, the few firms control the market.

Monopolistic competition refers to a market structure that is a cross between the two extremes of perfect competition and monopoly. 

The model allows for the presence of increasing returns to scale in production and for differentiated (rather than homogeneous or identical) products.

However the model retains many features of perfect competition, such as the presence of many firms in the industry and the likelihood that free entry and exit of firms in response to profit would eliminate economic profit among the firms.

As a result, the model offers a somewhat more realistic depiction of many common economic markets. 

The model best describes markets in which numerous firms supply products which are each slightly different from that supplied by its competitors.

Examples include automobiles, toothpaste, furnaces (ovens), restaurant meals, motion pictures, romance novels, wine, beer, cheese, shaving cream and many more.