Very
few markets or industries in the real world are perfectly competitive. For
example, how homogeneous is the output of real firms, given that even the
smallest of firms working in manufacturing or services try to differentiate
their product.
The
assumption that producers and consumers act rationally is questioned by behavioural
economists, who have become increasingly influential over the last decade.
Numerous experiments have demonstrated that decision making often falls well
short of what could be described as perfectly rational. Decision making can be
biased and subject to rule of thumb ‘guidance’ when consumers and producers are
faced with complex situations.
Although
unrealistic, it is still a useful model in two respects. Firstly, many primary
and commodity markets, such as coffee and tea, exhibit many of the
characteristics of perfect competition, such as the number of individual
producers that exist, and their inability to influence market price. Secondly,
for other markets in manufacturing and services, the model is a useful
yardstick by which economists and regulators can evaluate levels of competition
that exist in real markets.
The benefits
of the Model of Perfect Competition
It
can be argued that perfect competition will yield the following benefits:
1. Because there
is perfect knowledge, there is no information failure and knowledge is shared
evenly between all participants.
2. There are no
barriers to entry, so existing firms cannot derive any monopoly power.
3. Only normal
profits made, so producers just cover their opportunity cost.
4. There is no
need to spend money on advertising, because there is perfect knowledge and
firms can sell all they can produce. In addition, selling unbranded goods makes
it hard to construct an effective advertising campaign.
5. There is
maximum possible:
o
Consumer surplus
o
Economic welfare
6. There is
maximum allocative and productive efficiency:
o
Equilibrium
will occur where P = MC, hence allocative efficiency.
o
In
the long run equilibrium will occur at output where MC = ATC, which is
productive efficiency.
7. There is also
maximum choice for consumers.
11 comments:
The closest example we may have for such kind of market can be market for agricultural products like in case of wheat ,there are numerous buyers and sellers.As a result no single buyer and seller can significantly affect the market price of wheat.
But due to the homogeneity of goods ,purchase of a commodity is matter of chance and not of choice.No firm is in a position to charge a different price and no buyer will pay a higher price.As a result a uniform price prevails in market.As the factors of production are perfectly mobile,they are free to move to the industry in which they get the best price.Also there is no selling or transportation costs.In short ,we can say that the firm is a price taker and industry is the price maker.Decisions of consumers and sellers are coordinated through free flow of prices.
Sir, being the identical goods, how will there be maximum choice availibility as stated in the last point?
sir,I guess by choice you mean the choice of the sellers and producers for the same good.
sir,I guess by choice you mean the choice of the sellers and producers for the same good.
Sir I would like to answer the question raised by raghvendra. Being the identical product there is maximum choice for consumer that means if one seller charges high price for a particular commodity then the consumer will buy the product from the other seller because products are identical it would equally satisfy the consumer to the same extend, other seller may charge less price. Therefore there is maximum choice for consumer.
Closest example may be of FREE SOFTWARE. Anyone is free to enter and leave the market at no cost. All codes is freely accessible and modifiable, and individual are free to behave independently. Free software may be bought or sold at what ever price that the market may allow.
Sir I would like to answer the question raised by raghvendra. Being the identical product there is maximum choice for consumer that means if one seller charges high price for a particular commodity then the consumer will buy the product from the other seller because products are identical it would equally satisfy the consumer to the same extend, other seller may charge less price. Therefore there is maximum choice for consumer.
Closest example may be of FREE SOFTWARE. Anyone is free to enter and leave the market at no cost. All codes is freely accessible and modifiable, and individual are free to behave independently. Free software may be bought or sold at what ever price that the market may allow.
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