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Econ: What is Perfect Competition? 3 Views


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What is Perfect Competition? If a theoretical market showed perfect competition, this would mean that all products are equally as useful and effective, the prices of these products can’t be affected by the companies who make them, companies can join or leave the market without consequences, and consumers have all necessary information to make informed decisions regarding purchases.

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English Language

Transcript

00:00

And finance Allah shmoop What is perfect competition people It's

00:08

true in the real world and nothing's perfect and markets

00:11

are no exception Perfect competition is a hypothetical market structure

00:15

one where no firms are undercutting each other and consumers

00:19

never get ripped off While perfect competition doesn't exist in

00:23

the real world it's a useful bar to compare other

00:25

market structures to something like Oleg Op Elise monopolies monopolistic

00:30

competition and other things of similar ilk There are five

00:34

key ingredients in the perfect competition Punch bowl one There's

00:38

no differentiation in goods and services I all firms they're

00:41

selling the same stuff within one market For instance in

00:45

order for the lemonade market on Maple Street to be

00:48

in perfect competition Jill Joe and Sammy would all be

00:51

selling the exact same kind of lemonade Same amount of

00:55

lemons sugar and water in each same colored cup In

00:59

reality though Jill's differentiated her product by making it raspberry

01:03

lemonade Joe has added extra sugar for the sweet tooth

01:07

crowd and Sami is playing the organic card when there's

01:11

differentiation in products that makes competition imperfectly Since firms air

01:15

signalling to customers why their specific product is preferable to

01:19

the other a similar ones This commonly seen type of

01:22

imperfect market structure a market selling differentiated products is called

01:27

monopolistic competition Okay too in perfect competition all firms are

01:32

priced takers That is when firms are priced takers they

01:36

are at the mercy of the price set by the

01:39

market in the Maple Street lemonade market While that would

01:42

mean Jill Joe and Sami's identical lemonades would all sell

01:45

for the same amount it's called one dollars Exactly If

01:48

Joe tried to raise the price of his lemonade to

01:51

a dollar and a quarter consumers would leave him entirely

01:55

and just go by Jill or Se Mi's lemonade instead

01:57

which would put Joe while pretty much out of it

02:00

Remember they're all selling the exact same stuff in a

02:03

perfectly competitive market In reality Joe is charging a dollar

02:07

and a quarter And while he's still in business Jos

02:10

clientele are willing to pay that extra quarter for that

02:13

extra sugar high And Sami's organic crowd followers are loyal

02:17

right his lemonades even more expensive than Jos at two

02:20

dollars But it sells just fine because Sami's consumers only

02:23

wanna buy organic will Jail still gets her fair share

02:26

of customers too because well there's a niche market for

02:28

raspberry lemonade These kiddos are all making their own prices

02:32

with their differentiated lemonade rather than being at the mercy

02:35

of the markets deemed price right total pure price takers

02:38

Next up Three buyers know all of the details on

02:42

products and prices in perfectly competitive markets That's how buyers

02:46

enforce perfect competition They'LL put anyone out of business by

02:49

not buying from them if they confined the same product

02:52

for a better deal elsewhere Think about how Joe would

02:55

run himself out of business if he was selling the

02:58

same lemonade as the others at a higher price Right

03:01

Remember that Well in the real world buyers don't have

03:03

perfect information We have what marketers tell us on they

03:07

may or may not be over selling their wares G

03:10

What marketer doesn't lie to you And we have things

03:12

like online reviews you know many of which are fake

03:15

And then we have recommendations from friends and we have

03:18

yelp We can comparison shop products and their prices In

03:22

reality Thank you Internet With all the technology we have

03:25

nowadays well it's given us access toe wave or information

03:28

than ever before And it's also given us access to

03:31

more products and services than ever before right Okay so

03:34

moving on number four In a market with perfect competition

03:37

there are no barriers to enter and no barriers to

03:40

exit the market In the lemonade market Any kid could

03:43

open up a lemonade stand with essentially no startup costs

03:46

And if the market was too competitive while any kid

03:49

would close their lemonade stand without worrying about trying to

03:53

stick it out you know since they already had bought

03:55

all their lemonade making paraphernalia When markets are easy to

03:59

enter and exit keeps firms as price takers they're at

04:02

the mercy of the market If the lemonade kids air

04:05

you know business owners created in Olongapo Lee deciding to

04:08

collude on price wealth new lemonade stands would pop up

04:11

and an undercut their plan Like for example if Jill

04:14

Joe and Sammy all agreed to sell their identical lemonade

04:17

at Buck fifty instead of buck wealth and new kids

04:20

on the block Jake Jordan and Sarah might all open

04:23

their own lemonade stands being competitors charging one dollars per

04:27

drink instead of that buck Fifty Guess what Well then

04:30

Jill Joe and Sammy would then either have to lower

04:32

their prices back to a dollar or they go out

04:35

of business Right Number five There are only small firms

04:38

and perfectly competitive markets Definitely no oligopolies monopolies or uh

04:43

well Amazon which would mean Jill Joe and Sammy all

04:45

have a small share of the regular old lemonade market

04:48

There's no dominant player in the real world Firms are

04:51

incentivized to grow since it usually means they can benefit

04:54

from increasing returns to scale making more with less So

04:58

for example in the real world Jill's Raspberry Lemonade is

05:01

able to sell at a lower price because she owns

05:03

about half of the lemonade market on Maple Street But

05:06

in actuality Jill ran Jeannie's raspberry lemonade stand out of

05:10

business because while Jill was selling her raspberry lemonade at

05:13

a lower price than Jamie could afford Teo make hers

05:16

You know like how Wal Mart Target Costco and other

05:19

big corporations ran their smaller mom and pop shop competitors

05:23

out of business When there are a few firms or

05:25

one big one in a market it's typically when they

05:28

become old apples or monopolies which makes them Franks makers

05:31

instead of price takers right So to recap perfect competition

05:34

is hypothetical market structure where one there's no differentiation in

05:38

products to firms are priced takers not makers Buyers have

05:41

complete information There are no barriers to enter or exit

05:45

the market as a seller And five all firms are

05:48

small and modest Commodity markets like grain and oil are

05:51

the closest things we have in real life too Perfect

05:54

competition There's not too much differentiation happening there and buyer

05:57

information is more complete in those markets than in most

06:00

We can use the concept of perfect competition to analyze

06:03

what's happening in imperfectly competitive markets And you know the

06:07

rationale behind all that while perfect competition sounds great for

06:10

consumers since it prevents price setting by firms of the

06:13

real world isn't all that bad Differentiation is great We

06:16

wouldn't have Coke and Pepsi and rotten Apple otherwise and

06:19

economies of scale can make prices even lower than before

06:22

A world with complete information would be also nice but

06:25

sometimes life hands you lemons and well you've got to

06:27

know how to squeeze the juice out of them So

06:29

good luck with that

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