Question

1. Why don't we have a perfectly competitive system? (go over each of the requirements for perfect competition and explain why that does not occur).

2. Which of the requirements do you think is the most important reason we don't have a system of perfect competition? Explain.

Please give me a short paragraph for each question.

Answer 1

1)perfectly competitive system is a highly idealistic system in which there are several assumptions which do not fit into the real world. one of the assumption is perfect information which means that every market participate is perfectly informed. this is highly unrealistic because most of the consumers are not aware of the quality of the product. Take for example the stock market in which market participants do not have full knowledge of listed stocks. Secondly, there is free entry and exit in the perfectly competitive system, an assumption which does not find its place in the real world. There are definite cost of shutting down the business and opening up in new sectors due to which entry and exit is never free. the market also assume that there is free movement of resources between sectors which is also not realistic since there are definite costs of such movements

2)The most important requirement which helps a perfectly competitive market in sustaining is free entry and exit in the long run. Most of the markets in real world has forms that are either suffering from losses or they are continuously earning profit. this includes the market of oligopoly and monopoly in which which country is restricted by the dominant firms. New players cannot enter the market without spending huge cost of startup. If this obstacle is removed and new firms are allowed to enter market competition will increase and prices will brought down close to the marginal cost of production.