Question

Chapters three and four are a review of your training from the first phase of your principles of microeconomics. The supply and demand framework supposes the application of pure competition and all of its assumptions. Thus its conclusions are the result of these assumptions. discuss the potential managerial problems of analyzing a real world market while only considering the nature of said market to be purely competitive.

Answer 1

Perfect competition is, in neoclassical economics, a theoretical market structure in which six economic conditions must be met. Neoclassical economists argue that for both consumers and society, ideal competition would deliver the best possible economic outcomes.

In order for a market to be considered perfectly competitive, these conditions must be fulfilled: all firms offer the same product; all firms are price-takers; all firms have a relatively small market share; consumers know the essence of the product being offered and the prices paid by each firm; the freedom of entry and exit characterises the industry. Outside of the optimal competition model, all real markets exist because it is an abstract, theoretical model.

CLAVE TAKEAWAYS
Neoclassical economists argue that perfect competition, a theoretical market structure, would provide both consumers and society with the best possible economic results.
Outside of the perfect competition model, all real markets exist because it is an abstract, theoretical model.
Significant barriers hinder the actual development of perfect competition in the real economy.
Entry barriers forbid perfect competition
One aspect of a market that meets perfect competition is that an equivalent commodity is offered by all businesses. In fact, there is some degree of differentiation in most products. Producers can differ in their given method of purification, product size, and brand identity, even with a product as seemingly simple as bottled water.

Significant barriers hinder the actual development of perfect competition in the real economy. The agricultural sector often comes close to showing the characteristics of a perfectly competitive industry. There are many small producers in the agriculture industry with almost no opportunity to alter the sale price of their goods. Commercial purchasers of agricultural goods are often very well-informed in general. Finally, while some barriers to entry include agricultural production, it is not especially difficult to reach the marketplace as a producer.

The Criticism of Ideal Competition by Economists
Although neoclassical economists assume that a ideal market system is created by perfect competition, with the best possible economic results for consumers as well as for society, they do not necessarily assert that this model is representative of the real world.

As such, it is debated whether perfect competition as a theoretical benchmark for real economic markets should be used or not. Neoclassical economists argue that it can be useful to have perfect competition, and most of their analysis stems from its principles. Many other smaller schools of economic thought disagree that perfect competition is a useful model and challenge whether or not it can produce meaningful economic effects for consumers and companies if it could be executed in actual economic markets.

By following the rule that profits are maximised by selling at the quantity where price is equal to marginal cost, perfectly competitive firms ensure that the social benefits earned from selling a good are compatible with the social costs of production.
Let's walk through an example to discuss more deeply what allocative effectiveness means. Let 's start with the assumption that the wholesale flower market is very competitive, so P} = MC}P = MCstart text, P, end text, equals, start text, M, C, end text. Now, imagine what it would mean if businesses manufactured a smaller number of flowers in that market. Marginal costs would not have risen as much at a smaller amount, because the price would have exceeded the marginal cost: {P} >MC}P > MCstart text, P, end text, is higher than, start text, M, C, end text.

Some economists are highly critical of the dependency on perfect competition of the neoclassical school. It is possible to roughly divide opponents of perfect competition into two categories. The first community argues that the assumptions built into the model are so unrealistic that any practical insights can not be generated by the model. The second group argues that not even a favourable theoretical result is ideal competition.

For instance, Friedrich Hayek, the Austrian economist and 1974 Nobel Prize winner for Economics, argued that perfect competition had no right to be called "competition." Hayek argued in his criticism of perfect competition that the model excludes all competitive activities and reduces all buyers and sellers to mindless price-takers. The Austrian School of Economics was influenced by Hayek's contributions to the field of economics.

The Czech economist Joseph Schumpeter, who is also a member of the Austrian School of Economics, pointed out that research, development and innovation are conducted by economically productive companies , making perfect competition in the long run less effective than imperfect competition.

Perfect rivalry is a hypothetical benchmark in the long run. Companies will not always sell at the lowest average cost, nor will they always set price equal to marginal cost, for market systems such as monopoly, monopoly competition, and oligopoly, which are more widely found in the real world than perfect competition. Thus, efficient and allocative efficiency will not be provided by these other competitive situations.
In addition, real-world markets contain several problems that are presumed in the ideal competition model, including pollution, emerging technology innovations, poverty, which may render certain individuals unable to pay for basic life needs, government initiatives such as national defence or education, labour market inequality, and buyers and sellers that need to deal with incomplete and uncertain information
However, the theoretical efficacy of perfect competition offers a helpful benchmark for comparing the problems resulting from these real-world issues.