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| | Perfect competition is a set of conditions that are ideal for someone ''benefiting'' from the competition, such as a consumer of a good who wants the best quality and the lowest price. The conditions are these: | | Perfect competition is a set of conditions that are ideal for someone ''benefiting'' from the competition, such as a consumer of a good who wants the best quality and the lowest price. The conditions are these: |
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| − | 1. Many buyers and sellers. | + | 1. '''Many buyers and sellers.''' You can't have perfect competition without a lot of competitors! In a classroom situation, two or even five students competing for a good grade may not be enough. If a few get lazy, then all may stop working. But in a large group of students, you can be sure that someone is working hard. Similarly, the more gas stations in an area, the more the competition. |
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| − | 2. Goods that are substitutes for each other. | + | 2. '''Goods that are perfect substitutes for each other.''' The ability to substitute one for the other is what makes the market so perfectly competitive. Pencils are so inexpensive because there are so many perfect substitutes for them, as one brand of pencil substitutes easily for another. Any variance in quality would prevent perfect substitution, and frustrate perfect competition. |
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| − | 3. perfect knowledge in the market. | + | 3. '''Perfect knowledge in the market.''' Fully informed consumers and suppliers are also necessary for perfect competition. If Wendy’s is selling a hamburger at a lower price than McDonald’s or Burger King, but no one knows about Wendy's, then the competition is not going to be perfect. McDonald's and Burger King would be able to continue to sell overpriced hamburgers. |
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| − | 4. Perfect mobility of resources. | + | 4. '''Perfect mobility of resources.''' Put another way, the competitors must have identical costs for their supplies. If one competitor, say a gas station, has higher costs than the others, such as a higher price of gas from its suppliers, then it is not going to be able to be competitive. |
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| − | Also, there cannot be any price discrimination.
| + | (Additionally, there cannot be any price discrimination. Ignore this point if you do not recall what "price discrimination" is!) |
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| + | Every Economics exam has a few questions about "perfect competition," and you will answer them correctly by remembering the above four points and applying them correctly. |
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| − | 4. There needs to be enough companies making the same good to ensure that is enough real competition. Two or even five students competing for a good grade may not be enough. They may all work less in the expectation that others are working less also. In a large group of students, however, you can be sure that someone is working hard. Likewise, two gas stations on a street corner may not be enough to establish perfect competition. They can watch each other’s prices and both may raise them. But five or so independent gas stations in an area would be competitive.
| + | Beyond the value of acing exams, perfect competition is useful as an ideal against which to analyze imperfections. Understand why a market does not have perfect competition, and then it becomes easier how to deal with that market, or how improvements might occur. |
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| − | 3. The competitors must have identical costs for their supplies. If one competitor, say a gas station, has much higher costs than the others, then it is not going to add much to the competition. Conversely, if a gas station were sitting on top of an oil well, then it may not ensure perfect competition either. It may reap enormous profits at the expense of the consumer, or it may first drive the other gas stations out of business and then raise prices for its gas even higher than what the other stations had been selling it at.
| + | An investor in the stock market may want to stay away from companies that are in perfectly competitive markets, because the competition will reduce prices and profits for the companies. But a buyer or consumer prefers a perfect competition because it lowers price and improves quality! |
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| − | 4. Fully informed consumers and suppliers are also necessary for perfect competition. If Wendy’s tried to sell a healthy burger but few knew about it, then its competition with greasy burgers by McDonald’s or Burger King is not going to be perfect.
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| − | 1. Goods that are perfect substitutes for each other must be provided by different companies. Pencils are a good example, because it is a standard good. One brand of pencil substitutes easily for another. Any variance in quality would prevent perfect substitution, and perfect competition.
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