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Why is perfect competition sometimes regarded as an ideal market structure and why does Samuelson write that it doesn't faithfully represent the facts about modern industry?

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  • May 24, 2004
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Perfect competition sometimes is regarded as an ideal market structure because it

supports the actual ideology of a free market economy where, for example there is no government intervention. The entrepreneur in perfect competition works independent of other entrepreneurs and each individual buyer or seller does not influence the market, there are perfect substitutes for all goods and the demand is perfectly elastic, hence there is no price rise or fall. As should be, there is a freedom of entry and exit of firms. Both the consumers and producers have a perfect knowledge of market conditions. The demand curve is equal to the marginal revenue curve meaning that the firm sells whatever it produces and there is no inventory tax. Having MR=MC, the firm makes as much profit as possible.

Perfect competition is the most stable market form, and hence the most desirable. It leads to the best possible efficiency for the firm. It works best for both the buyers and sellers and works in accordance to each person's needs and abilities. It is a condition where each market should be and is used as a model to understand and predict real life situations.

However, Samuelson writes that perfect competition does not faithfully represent many of the facts about modern industry because life in the economic world can never be perfect. There can never be a market close to having perfect conditions for competition. It is true that many markets, such as the ones for raw materials come close to being in perfect competition, they can never truly achieve perfect competition.

This is due to many factors but particularly the dissatisfaction of the characteristics of a perfect competition market as described above. As soon as a firm in a perfect competition decreases its price, it enters the realm of imperfect competition.

Also, in today's world, a firm spends a lot of money on advertising and PR. A firm that does not spend money on R&D or advertising will not be able to influence...