The Theory of the Firm - Perfect Competition

In perfect competition, all firms are separate and independent from each other - Each firm operates as an individual enterprise looking only to its own best interests. Each is in contention with all the others for a share of the market. Perfect competition is an extreme situation in which competition is as strong as it could ever possibly be. There are 4 conditions for perfect competition:
1)A large number of buyers and sellers. There must be so many participants involved that no one of them acting alone is able to have any noticeable effect on the overall demand or supply position.
2)A homogenous product - The goods from each of the sellers must be absolutely identical in every respect to those of all the others. This means there is no advantage for the consumer to buy from any particular supplier rather than any other.
3)Perfect knowledge - No one has any privileged information. All participants are fully informed, all the time, about everything that is going on in the market.
4)Freedom of entry and exit to the market. Everyone involved is a willing participant. No one who wants to buy or sell is prevented from doing so in any way. One consequence of this condition is that there must be plenty of productive resources easily available to those who want them.

These conditions are very extreme. There is probably no real market anywhere in the world that completely compiles with them. The point of this hypothetical market is to show, as clearly as possible, the effects of competition upon a supplier.

Posted by Guest on 13 October 2005, 13:16

12 comments:

1. Vanda said: (08 December 2006, 18:29)
It is a very arbitrary abstract , unrealistic economic model which never exist in the real world. In this ridiculous model, there is no Competition. why? It is very simple indeed. The firms are Price Taker, all the products are homogeneous, producers and consumer both have pure information, all have same technology,etc. as a consequence, there is no competiton in this absurd model.

2. armin said: (08 December 2006, 18:35)
yes vanda u r absolutely right! In this model firms can not change Price, they are solely price taker Firms do not need to advertise, coz they have perfect information Firms can not competite for better quality, coz all the products are identical do not laugh plz!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

3. VANDA NOJAN said: (08 December 2006, 18:40)
hey Armin!!! How r u??? I think that this model is an evident paradox. This model is called " Perfect Competition", but there is no competition in it. And u know that Competition is a PROCESS not a STRUCTURE. it is very important to know, isn't it??? Lets discuss about this model more, ok my friend??

4. Vanda said: (08 December 2006, 18:53)
I perer u to read Marixian Theory Of Competition (department of economics, University of macedonia, 2003); It is very interesting... u will be pleased with it, bye

5. Alicia said: (08 December 2006, 18:58)
Hi vanda... so happy to see u here. Where have u been since 1 month ago?? I read what u have written about this model. I rather agree with u. but plz see http://www.boogieonline.com/revolution/commerce/economic/books/kirzner.html and criticize it. In orthodox theory, competition and monopoly are situations; the theory models various market structures in equilibrium, labeling them 'competitive' or 'monopolistic.' The model of perfect competition is "the situation in which every market participant does exactly what everyone else is doing, in which it is utterly pointless to try to achieve something in any way better than what is already being done by others, and in which, in fact, it is not necessary to keep one's eyes open to what the others are doing at all." An obstacle to competition is any deviance from the assumptions of the perfect competition model. take care, see u

6. milad crow said: (08 December 2006, 19:02)
hi friends.... ooooooooooooooooooooooh I could not come on time..... sorry sorry sorry

7. VANDA said: (09 December 2006, 12:32)
Hi Alicia, I read ur e-mail. Thank u very much indeed. This PC has been a hot topic for talking about! As you know, "Capitalism" is based on "Selfishness"; But the model "pc" is derived from the ideology that is based on collectivist view that individual human person is subservient to society and people. It follows that that private property is not truly private. That's why you see LR normal profit in this model tends to "zero". (Notice that this model doesn't relevant to Socialism, because socialism respects to private ownership) But advocates of capitalism rely on neoclassical price theory and "pure and perfect competition model". So, it should accept the concept "altruism" rather than "Selfishness" which is its underlying premise. This is a contradiction.

8. vanda said: (09 December 2006, 21:27)
Hi Friends... plz see this treatise, I think is helpful http://www.sussex.ac.uk/Units/economics/micro1/lectures/pc_firm.doc

9. vanda said: (09 December 2006, 21:39)
mademoiselle Alicia, I have found some useful ariticles visit http://www.sussex.ac.uk/ good luck.... bye

10. alicia said: (10 December 2006, 22:24)
I have ozens of problems with increasing (or decreasing)-cost industries in Perfect Competition... plz helppppppppp meeeeeeeeeeeeee

11. VANDA said: (15 December 2006, 01:47)
alichia...... don't worry! Be happy! we all have PROBLEMS with this fu**ing model! by the way, I read ur third mail... but I am still disagree. bye

12. Alicia said: (25 December 2006, 21:00)
hi hi happy christmas !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1