Competition. Perfect competition and market efficiency in theories of equilibrium analysis. The mechanism of perfect competition (the most important)

Lecture notes, cheat sheets
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Competition. Perfect competition and market efficiency in theories of equilibrium analysis. The mechanism of perfect competition (the most important)

Lecture notes, cheat sheets

Directory / Lecture notes, cheat sheets

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24. Perfect competition and market efficiency in theories of equilibrium analysis. The mechanism of perfect competition

Perfect competition - historically the first and simplest type of market. It was he who was the environment where rivalry arose between initially equal market entities, which consistently leads to stratification, the separation of the largest and most aggressive participants in the market process, i.e., creates conditions for the emergence of a monopoly.

This form of market organization implies the presence of such a large number of sellers and buyers in the market that none of them, by their behavior, can significantly affect market conditions. The form of competitiveness is characterized by the possibility of independent actions to limit the ability of each of the subjects to unilaterally influence the general conditions for the circulation of goods in the relevant market. The anonymity of sellers and the anonymity of buyers make the perfectly competitive market completely impersonal.

Compared to the volume of supply and demand of individual sellers, the scale of the market is so significant that none of the market participants can influence the conditions of competition and the price of products, since their number is very large.

Properties of market entities:

1) are numerous;

2) independent;

3) occupy insignificant shares;

4) have unlimited freedom to enter and exit the market by anyone and nothing;

5) may start production, continue or stop it, make purchases in any amount or refuse them at their own will;

6) do not have market power;

7) buy and sell products at the prevailing market price, independent of them.

Conditions for perfect competition:

1) Product homogeneity. The products of firms in the view of buyers are homogeneous and indistinguishable, that is, the products of different enterprises are absolutely interchangeable.

2) Small size. Neither buyers nor sellers influence the market situation due to the smallness and multiplicity of all market participants.

3) Absence of barriers. Otherwise, sellers or buyers begin to behave like a single corporation, even if there are many of them and they are all small firms.

4) Perfect information. Information about prices, technologies and likely profits is freely available to absolutely everyone.

The value of the concept of perfect competition lies in the practical and methodological sense.

First, the model of a perfectly competitive market allows one to judge the principles of functioning of many small firms selling standardized homogeneous products.

Secondly, it is of great methodological importance, since it allows us to understand the logic of firms' actions.

Author: Ilyina V.N.

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