The main feature of any market is competition. Along with supply and demand, this element ensures its functioning.
Definition of the term
In fact, competition refers to various types of economic rivalry between those firms, companies and entrepreneurs that are engaged in the production of goods or services. The purpose of their confrontation is to obtain more favorable conditions for conducting production activities, selling their product and, consequently, increasing the amount of profit.
The essence of competition
The presence of competition is an incentive that encourages entrepreneurs to seek more profitable solutions to emerging production issues and problems. Competition has a special effect on the quality of the product, as well as on the speed of its marketing.
Sometimes forms of economic rivalry reach enormous proportions, and the intensity of passions and emotions reaches such a level that the expression “competition” becomes more than appropriate.
How competition is good for the market
Having entered the market, manufacturers are forced to constantly defend their positions, otherwise they will be among the many inconspicuous sellers of typical products. To attract the attention of the buyer, they apply new technologies, update the assortment, closely monitor new scientific and technical developments and introduce them into their production processes. In addition, in the interests of the manufacturer - the application of a rational approach to the distribution of its resources (material, labor, financial).
The presence of competitive conditions in the market allows consumers to use the most effective, efficient, attractive and cost-effective products.
Types of competition
Such a significant concept as "competition" combines a large number of narrower terms. There is a classification of competition according to various criteria, as a result of which the following types are distinguished:
- Intrasectoral.
- Intersectoral.
- Conscientious.
- Unfair.
- Price.
- Non-price.
In terms of market restrictions, there is free competition (pure, perfect) and imperfect. Next, we will consider the features of the functioning of the market in conditions of perfect competition.
Market economy of free competition
Competition is called perfect, in which numerous buyers and sellers (manufacturers) are represented on the market, who individually occupy a rather small segment of the market and cannot set any conditions for the sale or purchase of products.
It should be noted that perfect free competition is considered, rather, a theoretical concept that is extremely rare in the real world (for example, the securities market is closest to this model).
With free competition, information on price fluctuations, the state of supply and demand, as well as on manufacturing enterprises and buyers becomes publicly available even at the interregional level.
Another feature of pure competition is free pricing. That is, the price is not set by the manufacturer, but by the ratio of supply and demand.
Signs of a perfect competition market
You can judge the situation in a particular market by studying the features that characterize the free competition system:
- Numerous sellers (and buyers) represent similar types of products (or customer interest) and are equal in their rights.
- There are no barriers that can prevent a new entrant from entering the market.
- All market participants have access to complete product information.
- The goods sold are homogeneous and divisible.
- The inability to use non-economic means of influence on the part of one participant in relation to others.
- Production factors are characterized by mobility.
- Free pricing.
- There is no monopoly (one seller), monopsony (one buyer) and the state’s influence on pricing or the state of supply and demand.
The absence of at least one of the listed features does not allow us to say that competition is free (in this case it is imperfect). Moreover, the intentional removal of signs for the formation of a monopoly leads to unfair competition.
Why perfect competition is good for the economy
The mechanism of free competition allows you to create special conditions in the market that benefit both producers and consumers of the product:
- It is no secret that some decisions of a particular person or organization can significantly affect the achievement of desired goals. The advantage of having competition in the market is the depersonalization of solutions to economic problems, since there is no personal involvement of an entrepreneur or government official. At the same time, it makes no sense to lay claim to the obstacles that arise due to the play of competitive market forces.
- Free competition dictates unlimited freedom of choice. Any market participant has the opportunity to freely choose the field of professional activity, carry out purchases, and conduct business activities. A restriction can only be the degree of talent, as well as whether the entrepreneur is able to accumulate the necessary capital.
- The main advantage of pure competition can be considered the formation of such conditions for the producer and consumer, when they both benefit.
The described factor comes into force due to balancing of supply and demand indicators and the formation of equilibrium prices. This concept characterizes the price level that meets the marginal utility of the product for the buyer and corresponds to the level of production costs.
- A market with free competition can be called a regulator of social production, since with its help it becomes available to solve a number of tasks of a specific economic nature. It ensures the existence of conditions for the optimal use of scientific and technical developments that are used in the production process of new products (the introduction of new techniques and technologies, the development of improved methods for organizing and managing the production process). Market participants are forced to adapt and adapt to new requirements for quality, appearance and cost of production.
- The goal of a free market system is the ultimate human need. Thanks to this, the entire economy is focused on consumers and their needs (which are expressed in solvent demand).
- A market in which perfect competition (free, clean) operates is characterized by an optimal distribution of limited resources: they are used where it can be done as efficiently as possible.
The role of the state in market relations
The opinions of many economists agree that the market structure is not able to provide for the satisfaction of the needs of all members of society, therefore it is necessary to introduce another institution that can cope with this task. These functions are undertaken by the state. In order to restore equilibrium in the market, the state is taking some measures to regulate market relations and competition, including. The main legal act is the Federal Law "On Protection of Competition", its provisions are mainly aimed at creating obstacles to the formation of monopolies.
Disadvantages and problems of free competition
In the list of the main problems of a socio-economic nature that cannot be solved by the market, the following can be listed:
- The inability to provide the economy with sufficient financial resources. Therefore, the state organizes the monetary circulation of the country.
- The inability to ensure the satisfaction of the specific needs of society. Free competition provides for the satisfaction of those needs that can be expressed by individual payment demand, however, others should be taken into account (roads, dams, public transport and other goods intended for collective use).
- Insufficiently flexible revenue sharing system. The market mechanism perceives as fair any kind of income received in the competition. However, such social strata as disabled people, pensioners, poor and disabled citizens are not taken into account here. For this reason, government intervention and income redistribution is becoming a necessity.
