Question

- Few markets in the real world have the characteristics of a perfectly competitive market. Does that mean that the predictions of the model of perfect competition are not very useful in predicting how markets in the real world work? Discuss. (Please in a written text, not a pic)

Answer 1

yes, I agree with the statement that model of perfect competition are not very useful in predicting how markets in the real world work. The modern firms are very different from the ones modeled in the neo-classical models. Pefect competition makes very strong assumptions that are never seen in the real world. Firsm do not sell identical products in the day and age of brands itself differentiating even perfectly homogeneous products, all firms do not have a small market share with a few in each product line having the dominant position. Buyers indeed can not know the prices of each and everything all the time and there are restrictions on the entry and exit of the firm. All these characteristics make perfect competition, used as it maximizes the total welfare, a redundant modeling exercise. The results derived from such models may not be applicable to the real world. Hayek in the [ast has criticised the perfect competition models on grounds that buyers and sellers are are removed to mindless price takers which si just not true. Schumpeter argued that R&D and innovation is undertaken only by profitable firms and thus imperfect competition is superior to perfect competition (with 0 long run profits).