Question

Why Model Something That Does Not Exist?

The purely competitive firm does not exist in the real world anymore having disappeared in the USA by the early 1930's at the latest. The question is: so why do we model it in almost every textbook in Economics? What use does it serve? Discuss the relevance of the characteristics of the purely competition firm. Can you think of other things in other fields that we model, that do not exist anymore?

Answer 1

Yes it is true that perfect competition is non-existent although we may see its traces in market for gold or market for potatoes . But purely competitive industry does not exist anymore . But the importance of this model still exists . We learn perfect competition to compare the situation with other forms of market such as monopoly and oligopoly . perfect competition and perfect monopoly are two extreme situations . Other forms of market are either mixture of both or lie in between . The model of perfect competition is given in almost every textbook because it is the basic market structure and it serves the purpose of better understanding of market structures .

The characteristics of homogeneous product , too many firms , free entry and exit , price equal to marginal cost etc is relevant in many cases . Let us take the example of market for vegetables such as potatoes . Potatoes can be sold as differentiated goods by forming a different branch of organic potatoes , but almost all varieties are considered to be homogeneous . So here the characteristics of zero profits in long run , too many firms etc are relevant .

The Ricardian trade model of two countries producing two goods does not exist .