Perfect Competition Market Model
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Small businesses might not be successful if risks are avoided, and capitalism thrives on new businesses as part of its cycle to diversify the economy. This discussion will define the perfect competition market model, address the models critiques, and touch upon the models implications.
Perfect Competition Market Model
Perfect competition (PC) is one of several models used to explain the nature of competition among companies. PC represents an ideal case in which competition leads to the most beneficial outcome for consumers (Block, Barnett & Wood, 2002, p. 51). PC is known as pure competition, and describes a hypothetical market in which no producer or consumer has the market power to influence prices (Investopedia, 2006). The PC model uses the following assumptions:
Homogeneity – Companies provide goods and services that are perfect substitutes–in other words, identical. Since product differentiation is absent, each company possesses only a small market share.
Perfect and complete information – All companies and consumers know the prices set by all companies. Buyers know the nature of the product sold as well as the prices charged by each company.
Equal access – Information is freely available with concern to technology, input prices, output price, and other factors that might affect production decisions. No company has any advantage over any other company in producing output.
Free entry – Any firm may enter or exit the market as it wishes.
In the PC model companies are “price takers,” which means the market sets the price, not the companies (Investopedia, 2006). Companies can sell as much output as they like, without affecting the outputs market price. No firm is assumed to produce a significant amount of total industry output; therefore, no single firm has any effect on output price (Block, Barnett & Wood, 2002). As profit motivates each company, the company reaches a production point where price and marginal cost are equal. At this “perfect point of juncture” PC holds that societys resources are being “allocated efficiently” (McConnell and Brue, 2004, p.434). McConnell and Brue report that PC promotes efficient allocations of resources since companies “seek to further their self-interest;” and this in turn creates an “invisible hand” that helps equalize the law of supply and demand (2004, p. 433).
Perfect Competition Market Models Critiques
PC is primarily used as a benchmark against which other market structures are compared (Allen and Hellwig, 1986). If PC “was an accurate portrayal of reality, there would be no need for advertising, marketing, or any