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| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
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| − | In this Lecture we introduce the concept of "perfect competition." Let's start with "competition", a word that was first used in 1605, after Shakespeare wrote nearly all of his plays. | + | In this Lecture we introduce the concept of "perfect competition." To get to "perfect competition," let's first learn what "competition" is, and let's learn it well. |
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| − | Can we define "competition", and then "perfect competition"?
| + | According to the dictionary, "competition" was not first used in 1605. What conclusion might an historian draw from that simple observation? Shakespeare had completed nearly all his plays by then, and a search of all of Shakespeare's works reveals that he never used the word, not even once.<ref>http://www.opensourceshakespeare.org/</ref> Imagine that! |
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| | + | Leonardo da Vinci competed with Michelangelo, and the world benefited from their achievements. In math and physics, Isaac Newton competed with Leibniz and a river of accomplishments flowed. Sports rivalries are famous also for bringing out the best in each side. |
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| | + | In business, it is the competition that brings out the best service, highest quality goods, and lowest prices. Wal-Mart competes with Target and K-Mart. Federal Express competes with UPS for shipping services. Phone companies compete with either for cell phones and home service. Television stations compete with each other. Fox News competes with CNN. Politicians compete with each other to win elections. And so on. |
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| | + | We all think we know what "competition" is, but can we define it precisely? Here's one attempt: "competition is the rivalry by people or companies for achievement, success, customers, attention or praise." Not all competition is good: competition for praise could land the winner in the pitfall set forth in the Bible: "and the first shall be last, and the last shall be first!" |
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| | + | But competition for customers is something we like, particularly as a customer. It means companies will be constantly trying to offer a lower price and better deal than their rivals. That saves us, as customers, money, and allows us to obtain better goods and services. Without the competition, we would be stuck with companies that charge as much as they like, and provide as poor quality goods and services as they want. Competition rewards hard work; the lack of competition encourages laziness. |
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| | + | The economic definition of competition should include rivalry for resources in addition to customers, as companies can compete with each other for workers too. So let's define competition in economics as the "rivalry for goods, services or resources among different buyers or sellers." Perhaps you can improve on that definition. |
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| | + | It helps to look at the "perfect case," and that is "perfect competition." How should we define that? |
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| | + | ==Perfect Competition== |
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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: |
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| | + | 1. Many buyers and sellers. |
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| | + | 2. Goods that are substitutes for each other. |
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| | + | 3. perfect knowledge in the market. |
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| | + | 4. Perfect mobility of resources. |
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| | + | Also, there cannot be any price discrimination. |
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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. |
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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. |
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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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| − | that we all know. Can we define it precisely?
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| | <Rule Against Perpetuities> | | <Rule Against Perpetuities> |
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| | Businesses themselves, however, often dislike competition because it can reduce their ability to earn profits. To protect consumers, federal laws limit the ability of businesses to reduce competition. | | Businesses themselves, however, often dislike competition because it can reduce their ability to earn profits. To protect consumers, federal laws limit the ability of businesses to reduce competition. |
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| − | ==Perfect Competition==
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| − | Perfect competition is an ideal that rarely exists in practice. But the more competitive the market, the better it is for consumers, so it is useful to consider the conditions for perfect competition:
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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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| − | 2. 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.
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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.
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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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| | ==Costs== | | ==Costs== |
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| | 11. The account of the multiplication of the loaves by Jesus is unique in the way it is included in all four Gospels, and is even mentioned twice in Mark. Read the account, as in Matthew 14:13-21. Does that account change your view about scarcity, and whether scarcity really exists? Even if it does exists, is its significance exaggerated by a lack of [[faith]]? | | 11. The account of the multiplication of the loaves by Jesus is unique in the way it is included in all four Gospels, and is even mentioned twice in Mark. Read the account, as in Matthew 14:13-21. Does that account change your view about scarcity, and whether scarcity really exists? Even if it does exists, is its significance exaggerated by a lack of [[faith]]? |
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| | + | == References == |
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| | + | <references/> |
| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |
| | {{DEFAULTSORT: Economics Lecture 07}} | | {{DEFAULTSORT: Economics Lecture 07}} |