Perfect Competition
Perfect competition- Is it possible?
To claim that something is "perfect" is to say that it cannot be done better. In business and economy it is very common to think that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry.
It is a well worked out theory that has been around for over a century. The concept of competition is used in two ways in economics: competition as a process is a rivalry among firms; competition as the perfectly competitive market structure.
"Perfect competition" is achieved when, in a particular industry, all firms have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no discernible impact on the price at which its product is sold.
The basic problem with the theory of perfect competition is that, as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions. Firms that can achieve these technological transformations are innovative enterprises that drive a society's economic growth.
A perfectly competitive market must meet the following requirements: both buyers and sellers are price takers; the number of firms is large; there are no barriers to entry; the firms' products are identical; there is complete information; firms are profit maximizers.
By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the economy can share in the gains of innovation. Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and
To claim that something is "perfect" is to say that it cannot be done better. In business and economy it is very common to think that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry.
It is a well worked out theory that has been around for over a century. The concept of competition is used in two ways in economics: competition as a process is a rivalry among firms; competition as the perfectly competitive market structure.
"Perfect competition" is achieved when, in a particular industry, all firms have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no discernible impact on the price at which its product is sold.
The basic problem with the theory of perfect competition is that, as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions. Firms that can achieve these technological transformations are innovative enterprises that drive a society's economic growth.
A perfectly competitive market must meet the following requirements: both buyers and sellers are price takers; the number of firms is large; there are no barriers to entry; the firms' products are identical; there is complete information; firms are profit maximizers.
By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the economy can share in the gains of innovation. Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and