In: Economics
The examples of perfect competition are few and far between, yet economists attach significant importance to the characteristics of this market. Discuss why.
There are several characteristics of a perfect competition in a
market.
1. Easy entry and exit of the firms
2. No Price control
3. Homogeneity in the Products sold
4. Massive supply and demand (i.e. massive number of consumers and
suppliers)
5. Perfect Knowledge of the market
6. Limited government regulation
These are few important characteristics of a perfect competition
market.
Only very rare for a market to exist with all of the above
characteristics. But it is very important to stress upon these
aspects of this market as done by several economists. The
sellers are price-takers here. This is to say that they have almost
no control over the pricing of the products and only the market
shall decide it for them. If any of the above
characteristics are not followed then the market would not be a
perfect competition market.
--> For example, if the there is no homogeneity between the
products the sellers would have a choice to set prices according to
the customers' opinion over their 'particular' version of the
person. Hence perfect homogeneity is necessary.
--> In a similar way, the market must have a perfect knowledge
of the prices of the prices since this ensures the sellers to
'take' a price rather than assigning their own.
--> Massive supply and demand are necessary to maintain perfect
competition otherwise, the limited number of firms (or firm) would
assign higher than usual prices to their products. In a perfect
monopoly, the seller has all the freedom to charge exorbitant
prices. Hence a large number of suppliers and consumers are
necessary for perfect competition.
Hence the economists stress upon the importance of these
characteristics since any deviation from these would make the
market competition not-perfect.