Would it be beneficial for Australia if its markets were in perfect competition?

Question

Would it be beneficial for Australia if its markets were in perfect competition?

Answer 1

Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand. Perfect competition is a market equilibrium in which all resources are allocated and used efficiently, and collective social welfare is maximized.

When a firm is making a loss, it will have to decide whether to continue production or not. This decision will, in fact, depend on the different total costs levels and whether the firm is operating in the short run or in the long run.

If the firm is in the short run, and is making a loss whereby:

Total costs (TC) is greater than total revenue (TR)

and whereby total revenue is equal to total variable cost (TVC)

it is advisable for the firm to continue production. If it fails to achieve these conditions, it is advised to close down so that the only costs the firm will have to pay will be the fixed costs.

Even if the firm stops producing, it will have to continue to meet the level of fixed costs. Since whether the firm produces or not, it will have to pay fixed costs, it is better for it to continue production in an attempt to decrease total costs and increase total revenue, thus making profits. This can be done by:

Increasing productivity. The most obvious methods involve automation and computerization which minimize the tasks that must be performed by employees. All else constant, it benefits a business to improve productivity, which over time lowers cost and (hopefully) improves ability to compete and make profit.

Adopting new methods of production like Just In Time or lean manufacturing in an attempt to reduce costs and wastages.

In the long run, the condition to continue producing requires the price P to be higher than the ATC, i.e. the line representing market price should be above the minimumm point of the ATC curve.

If P is equal to ATC, the firm is indifferent between shutting down and continuing to produce. This case is different from the short run shut down case because in long run there's no longer a fixed cost (everything is variable).

Answer 2

Not very - a lot of domestic producers would need to close their production lines, thus many Australians would loose jobs - because production would shift to another countries. though Australian customers would benefit in short-run due to lower prices.

In long-run they would be out of accumulated income, and there would be strong pressure to increase specialization and economic efficiency.