Perfect competition Vs the real world

A detailed Summary of Perfect competition Vs the real world

Perfect competition is an economic theory of firms. Firms that meet in different levels of competition, respond in different ways, this is depending on the type of rivalry they will encounter. Whether it is price or cost of production through economies of scale (not as likely to exist in perfect competition), the product through technological advances or any other form of competing. Perfect competition does not actually exist as in the real world only monopolistic competition is seen. This is because there is not completely perfect knowledge and products are not homogeneous as they can be distinguished or differentiated in to different categories through price or quality.

The characteristics of perfect competition are:

¨ A large number of buyers and sellers

A large number of buyers and sellers must be present and firms must have a small share of the market. This means that there should not be a dominating monopoly power that could have an influence on the price of the product. Products should be homogeneous or identical to one another and consumers should realise this. Producers and consumers should be aware of pri

The real world does not encounter the same force of competition as described in perfect competition. In the real world monopolistic competition is the closest matching theory that exists. Differentiation between products that should be identical has been created. The existence of brand names hinders the ease of substituting a product for another, as with brand names comes quality, price and brand loyalty. If in reality a firm raised the price of its product it would lose some of its consumers however the theory in a perfectly competitive market is that all of the consumers will change to a rival product.

In the real world technology between firms vary and so firms operate at different profit maximising outputs. There is therefore a rivalry in finding the best technology available to produce goods. Firms also compete with production, distribution and advertising among other things. Only price is accounted for in perfect competition. So perfect competition assumes that all firms operate at the same level of technology, this obviously is not the case. Therefore the size of a firm is not taken into account, as some economies of scale may actually exist in a monopolistically competitive market.

ces and quantities sold within the market in order for the consumer to decide on which product to purchase. Barriers to entry and exit should not exist, making it very easy to set up businesses within the market. Due to some of these characteristics firms in perfect competition should be price takers as they are not large enough to have a say in the price they choose to charge. Therefore the firm should charge the going rate in the market and no more or less in ord

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Approximate Word count = 1122
Approximate Pages = 4 (250 words per page double spaced)

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