Another Econ Question: Perfect Competition
 

I've been thinking about this subject for a bit. I remember a brief discussion of perfect competition in my microecon class a few years ago, but I don't remember the teacher explaining the assumptions. Looking at these assumptions now, they seem totally unreasonable. Here they are, according to wikipedia:

Atomicity
*An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.

Homogeneity
*Goods and services are perfect substitutes; that is, there is no product differentiation.
Perfect and complete information

*All firms and consumers know the prices set by all firms (see perfect information and complete information).
Equal access
*All firms have access to production technologies, and resources are perfectly mobile.

Free entry
*Any firm may enter or exit the market as it wishes (see barriers to entry).

If you believe these assumptions are not unrealistic, could you explain to me why?

If these assumptions are unrealistic, then of what use is perfect competition to us in economics?

Re: Another Econ Question: Perfect Competition
 

[ QUOTE ]
I've been thinking about this subject for a bit. I remember a brief discussion of perfect competition in my microecon class a few years ago, but I don't remember the teacher explaining the assumptions. Looking at these assumptions now, they seem totally unreasonable. Here they are, according to wikipedia:

Atomicity
*An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.

Homogeneity
*Goods and services are perfect substitutes; that is, there is no product differentiation.
Perfect and complete information

*All firms and consumers know the prices set by all firms (see perfect information and complete information).
Equal access
*All firms have access to production technologies, and resources are perfectly mobile.

Free entry
*Any firm may enter or exit the market as it wishes (see barriers to entry).

If you believe these assumptions are not unrealistic, could you explain to me why?

If these assumptions are unrealistic, then of what use is perfect competition to us in economics?

[/ QUOTE ]

What is the use of Newtonian physics once we discovered relativity? What is the use of using g as a constant when it changes with distance?

Once you understand the basics, its easy to account for these external factors to the degree you need to.

Re: Another Econ Question: Perfect Competition
 

They are all reasonable.

do you see why?

Re: Another Econ Question: Perfect Competition
 

[ QUOTE ]
They are all reasonable.

do you see why?

[/ QUOTE ]

I'm guessing he does not, considering he wrote this:

[ QUOTE ]
If you believe these assumptions are not unrealistic, could you explain to me why?

[/ QUOTE ]

Re: Another Econ Question: Perfect Competition
 

"Perfect competition" is extremely useful. It allows for what passes as economists these days to characterize real world competition as "imperfect", and therefore flawed, and hence in need of "fixing." The "perfect competition" cannard is used to justify all sorts of interventions into the market. See the arguments trotted out on this board innumerable times about the lack of "perfect information" in the market.

Re: Another Econ Question: Perfect Competition
 

[ QUOTE ]
[ QUOTE ]
I've been thinking about this subject for a bit. I remember a brief discussion of perfect competition in my microecon class a few years ago, but I don't remember the teacher explaining the assumptions. Looking at these assumptions now, they seem totally unreasonable. Here they are, according to wikipedia:

Atomicity
*An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.

Homogeneity
*Goods and services are perfect substitutes; that is, there is no product differentiation.
Perfect and complete information

*All firms and consumers know the prices set by all firms (see perfect information and complete information).
Equal access
*All firms have access to production technologies, and resources are perfectly mobile.

Free entry
*Any firm may enter or exit the market as it wishes (see barriers to entry).

If you believe these assumptions are not unrealistic, could you explain to me why?

If these assumptions are unrealistic, then of what use is perfect competition to us in economics?

[/ QUOTE ]

What is the use of Newtonian physics once we discovered relativity? What is the use of using g as a constant when it changes with distance?

Once you understand the basics, its easy to account for these external factors to the degree you need to.

[/ QUOTE ]

The problem with this argument is that the "perfect competition" model bears no resemblence whatsoever to any economic situation in the real world. Newtonian physics is applicable to almost every physical situation in the everyday world. The two aren't in any way analogous.

Re: Another Econ Question: Perfect Competition
 

Yeah, I don't think anybody could ever claim that these are even vaguely realistic.

Given they are unrealistic I think this means that the dead weight loss is actually much less than that typically written in econ textbooks. Some dead weight loss in monopoly situations definitely still occurs but there's still no good reason to attempt to "fix" it with govt intervention.

Re: Another Econ Question: Perfect Competition
 

generic clothing has perfect competition.

Do you see why?

Re: Another Econ Question: Perfect Competition
 

[ QUOTE ]
generic clothing has perfect competition.

Do you see why?

[/ QUOTE ]
I don't. Please elaborate.

Re: Another Econ Question: Perfect Competition
 

A lot of the responses in this thread are weird. Perfect competition isn't a normative statement, it's a model of an economic scenario. If the assumptions you've outlined are true for a given market, then the model allows us to derive certain conclusions (e.g., the price will equal cost). If they aren't, then we need another model to make predictions.

Although the assumptions are probably not perfectly satisfied in any market, I suspect there are actually quite a few that are very close. Generic clothing might be one. Most raw materials are probably very nearly perfectly competitive.