Another Econ Question: Perfect Competition

[ojc02]

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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.

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While it's possible that they might have homogeneity, perfect information, and access to the technology, There's no way that there is atomicity and free entry. There are going to be large economies of scale and start-up costs to get into this industry and compete effectively on price with the big manufacturers.

[BCPVP]

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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.

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Ok, but it seems to me that some people are holding perfect competition as something "we" should strive for and wish to enforce certain regulations that attempt to reach that state.

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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.

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If I understand the assumptions correctly, there has to be many suppliers and there cannot be any barriers to entry like economies of scale. I guess I'm not much of an expert on the generic clothing industry, but I wonder if there really are no barriers to entry. Heck, even large fixed costs (like factory machinery to make clothes) would seem like a barrier to entry of sorts. I could be wrong on that point though.

This is where part of my confusion comes in, I guess.

[bobman0330]

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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.

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While it's possible that they might have homogeneity, perfect information, and access to the technology, There's no way that there is atomicity and free entry. There are going to be large economies of scale and start-up costs to get into this industry and compete effectively on price with the big manufacturers.

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Economies of scale aren't per se barriers to entry. Consider the following two scenarios:
1. Average cost decreases as market share increases, without limitation. Something like satellite TV might fit this model. You have to pay a billion dollars up front to buy the satellite, but once it's up there, you pay a flat or flattish amount to beam programming across your area. Each new customer decreases average costs. In this scenario, there's a huge barrier to entry. Unless you have some sweet competitive advantage, you need to capture half the market to have the same average cost as your competitor.
2. Average cost decreases up to a point, then it remains the same or increases with increasing market share. Consider a copper mine. You pay $10 million for a mineral concession in Chile, capable of producing, say 10,000 tons a month. If you underdevelop it and produce only 5,000 tons a month, your average costs will be higher than a competitor who goes full throttle. Your up front costs will be spread over half as many units as his. But buying two similar mineral concessions won't bring nearly the same benefit. Unless there are synergies in transport or administration, your average costs are the same. In fact, if managing two copper mines is harder than managing one, your executives might perform worse and produce higher average costs.

So, in scenario 2, all that's required is that you can scrape together enough money to buy a copper mine. Likewise, in clothing or other industries, at least conceivably, all you need to do is build an efficiently-sized factory or wheat farm to hang with the big dogs.

[Felz]

You do realize that perfect competition, or the fact that it leads to maximum welfare through the market mechanism (smith's invisible hand) is the biggest argument AGAINST governmental intervention.

Basically perfect competition deleivers a framework describing the first best economic world. So it's not a normative thing it's more of a starting point for analysis.

The assumptions coming with perfect competition weren't designed for they're realistic (noone really claims that) but for them being necessary to get its specific results.

[Darryl_P]

Just about all economics taught in colleges and universities is fatally flawed. It's designed to put you on leash so that you remain dependent on the system. That ensures that your energies are channeled into benign ends that don't threaten the current power structure.

The system acts like a self-serving organism caring only about its own survival. When you go down one of the paths it's enticing you to take, accepting the various trinkets and scooby snacks it offers as genuine symbols of status and honor, you are becoming a part of it and ceasing to be yourself. Essentially you are entering into a pact with the devil and relinquishing ownership of your soul.

[John Kilduff]

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Just about all economics taught in colleges and universities is fatally flawed. It's designed to put you on leash so that you remain dependent on the system. That ensures that your energies are channeled into benign ends that don't threaten the current power structure.

The system acts like a self-serving organism caring only about its own survival. When you go down one of the paths it's enticing you to take, accepting the various trinkets and scooby snacks it offers as genuine symbols of status and honor, you are becoming a part of it and ceasing to be yourself. Essentially you are entering into a pact with the devil and relinquishing ownership of your soul.

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This might have strong potential as a movie.

[TomCollins]

Ok, replace that with models of physics that account for frictionless surfaces, massless springs, or no wind resistance.

Are studying these examples "useless" too? They surely don't apply in the real world.

[Jamougha]

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

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Not much. No-one has worked out how to create a free market, that's why we have capitalism. [img]/images/graemlins/wink.gif[/img]

[Felz]

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Just about all economics taught in colleges and universities is fatally flawed. It's designed to put you on leash so that you remain dependent on the system. That ensures that your energies are channeled into benign ends that don't threaten the current power structure.

The system acts like a self-serving organism caring only about its own survival. When you go down one of the paths it's enticing you to take, accepting the various trinkets and scooby snacks it offers as genuine symbols of status and honor, you are becoming a part of it and ceasing to be yourself. Essentially you are entering into a pact with the devil and relinquishing ownership of your soul.

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Paranoid much?