Advantages & Limitations of Supply & Demand in a Perfect Competition
In economic terms, perfect competition refers to a system in which businesses enter and leave the market with ease. The prices charged by companies operating in a perfect competition vary with changes in supply and demand. Supply refers to the amount of product available to consumers. Demand refers to the desire of consumers to own the product. The conditions of supply and demand in a perfect competition have several advantages and limitations for the consumer.
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Fair Pricing
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One advantage of supply and demand in a perfect competition environment involves the fairness of product pricing. The supply of products and the demand for products in a perfect competition directly impacts the pricing. As the supply increases, the consumer's options increase and the prices decrease. As the demand increases, consumers are willing to pay more for the product. This process results in consumers paying a fair price for each product.
Sufficient Quality
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Another advantage encourages companies to invest a sufficient amount of resources into product quality. Consumers want to purchase high-quality products, but are only willing to pay a certain amount of money for that quality. As the level of product quality increases beyond a certain level, fewer consumers will be willing to pay the money, and demand for the product will decrease. This system encourages companies to invest enough money to ensure quality, but not to over-invest.
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Creation Of Classes
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One limitation of the supply-and-demand system in perfect competition is the creation of society classes. Individuals with fewer resources fall into a lower class, while individuals with more resources move into a higher class. As the market reaches its best price through the actions of supply and demand, some consumers lack the money to pay the market price for the product, while other consumers have sufficient money to purchase higher quality products.
Access To Social Services
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Another limitation of this system centers on the needs of individual consumers for specific products or services. For example, if supply and demand increases food prices, some lower income households may not be able to afford beef, surviving instead on noodles and other more affordable foodstuffs. The system may limit some consumers' ability to purchase items they may actually prefer.
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