European Car Market Essay Example | Topics and Well Written Essays - 2000 words

European Car Market - Essay Example In the real world, there is no such market as a perfect competition as every firm tries to differentiate its product from others and perfect competition involves perfect homogeneity. Perfect competition occurs where every characteristic of competition is known to the seller and as well as the buyer thus giving all information to the market. Due to the interaction of forces of demand and supply the market price stays for all thus the firms become price-takers and mainly compete on the terms of cost only. This raises the issue of profit maximization and firms in the perfect competition tend to increase their profits by only reducing costs. Further the point that perfect knowledge about the market means that despite of how much a firm produces it will get the same price throughout its production schedule as in a perfect market the average revenue is constant and so is the marginal revenue thus implying that the price elasticity is zero thus a decline or raise in price would bring about no change to the total revenue. In the perfect market, demand tends to stay constant throughout and since the firms are small, increment to the cost will only add up to the loss. The perfect market is more vulnerable to competition as there are many buyers and sellers. So the effect of entry and exit of a single supplier does not play a major role in upsetting the market whereas in the oligopolistic case, the effect of exit of any one firm plays a vital role in changing the entire market structure. Product Homogeneity and competition Product homogeneity is another factor that deters the taxonomy of the car industry as being perfect. In a perfect competition, the products are considered as homogenous thus they share the same attributes as of their rival products. This again reflects the point that this market is more prone to price changes and therefore entry and exit of firms will keep on happening. Consider that if the car market is to be called as perfect market then there would be many firms wanting to join the industry to reap better profits as it is a growing industry and so addition of new firms would keep on expanding the market thus there would be a time when the supply of cars will exceed the desired demand thereby causing a decline in price making many firms lose out. Thus only short term profits could be achieved and further it is possible that the losing firms may not be able to cover up their costs even. The point to be raised is that is there a substitute use of the machinery needed to manufacture cars Probably not as the technology required to build car engines would be in appropriate to be applied to Water-filters or cigarettes. In this case if the demand for cars falls so can the producer make a sudden move and go into the cigarette industry Never, it is difficult to shutdown large plants in a short period of time. Economies of Scale The point from which the economies of scale start is hard to attain at the momentary run. Economies of scale reflects the efficiency of the firm in the long run and in perfect competitio