|
Sponsored Links
In neoclassical economics and microeconomics, perfect competition describes a market in which no buyer or seller has market power. In the short term, such markets are productively inefficient and allocatively efficient. However, In the long term, such markets both allocatively and productively efficient.[1]. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells. Because the conditions for perfect competition are very strict, there are few perfectly competitive markets. A perfectly competitive market may have several distinguishing characteristics, including Some subset of these conditions is presented in most textbooks as defining perfect competition. More advanced textbooks (e.g. Mas-Colell et al. 1995 p. 315) try to reconcile these conditions with the definition of perfect competition as equilibrium price taking; that is whether or not firms treat price as a parameter or a choice variable. It is this distinction which differentiates perfectly competitive markets from imperfectly competitive ones. It should be noted that a general rigorous proof that the above conditions indeed suffice to guarantee price taking is still lacking (Kreps 1990, p. 265). The importance of perfect competition derives from the fact that price taking by the firm guarantees that when firms maximize profits (by choosing quantity they wish to produce, and the combination of Factors of production to produce it with) the market price will be equal to marginal cost. An implication of this is that a factor's price (wage, rent, etc.) equals the factor's marginal revenue product. This allows for derivation of the supply curve on which the neoclassical approach is based (note that this is also the reason why "a monopoly does not have a supply curve"). The abandonment of price taking creates considerable difficulties to the demonstration of existence of a general equilibrium (Roberts and Sonnenschein 1977) except under other, very specific conditions such as that of monopolistic competition .
|
Perfect Competition Subcategories
Perfect Competition Articles
|
| 
