What is Perfect Competition?
668 reads · Last updated: December 5, 2024
The term perfect competition refers to a theoretical market structure. Although perfect competition rarely occurs in real-world markets, it provides a useful model for explaining how supply and demand affect prices and behavior in a market economy.Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down.
Definition
Perfect competition refers to a theoretical market structure where there are many buyers and sellers, and prices are determined entirely by supply and demand. Companies earn just enough profit to sustain their business, without making excessive profits.
Origin
The concept of perfect competition originated in the 19th century economic theories, particularly through the works of Adam Smith and David Ricardo. Their studies laid the foundation for analyzing market structures in modern economics.
Categories and Features
Features of a perfectly competitive market include: 1. A large number of buyers and sellers; 2. Homogeneous products; 3. Complete transparency of information; 4. Free entry and exit from the market. These features ensure that market prices are determined by supply and demand rather than individual companies.
Case Studies
A typical example is the agricultural market, especially the wheat market. Since wheat is a standardized product, with many farmers involved in production, market prices are primarily determined by supply and demand. Another example is the foreign exchange market, which, although not meeting all conditions of perfect competition, is close due to its high liquidity and numerous participants.
Common Issues
Investors might misunderstand the feasibility of perfectly competitive markets, as few real-world markets meet these conditions entirely. Additionally, the lack of excess profits in perfectly competitive markets may limit investors' profit potential.
