Perfect competition

The perfect competition is an economic theory, the approach of which cannot be found in the real economy. Even if some markets show parallels, the real economy is characterized by the fact that providers want to offer customers the highest possible quality and conditions in order to override other providers in the long term.

Conditions for perfect competition

The perfect market is defined by a state of equality or homogeneity of some factors:

  • homogeneous and comparable goods
  • prices that cannot be influenced
  • Large number of suppliers and buyers
  • complete market transparency

Homogeneous and comparable goods - For the products offered, the approach means that they do not differ in quality. Each product of one type is the same as the other. In contrast to theory, the property of equality of a type of product can also be found in approaches in real markets. Parallels can be found with regard to oil and precious metals of the same purity.

Prices that cannot be influenced - The price offered is the same for products of the same quality. An urgent reference to the uniformity / homogeneity of the companies is necessary here, since other factors play a role in addition to the price and quality of the goods. Internal processes, marketing and reactions to market behavior must also be identical.

Large number of suppliers and buyers - One factor in the perfect market is demand. This is continuous and uniform. The product is purchased in the amount produced. The supply also plays a role: there are no bottlenecks that could cause the price to rise. The number of providers and consumers is large enough that fluctuations on one or both sides have no influence.

Complete market transparency - A final factor that has to be met is the transparency of the market at all levels: everyone can understand which end product or raw material costs how much at which level. Companies also have to react immediately to what is happening on the market.

Reality of perfect competition

currency- und Aktienhandel sind die einzigen Gebiete bei denen einige Faktoren erfüllt sind. Gewisse Unterschiede sind dabei noch immer vorhanden, so dass auch die Börsen und Devisenmärkte nicht absolut als vollkommene Wettbewerbsmärkte verstanden werden können.

Even in markets with fixed prices there is no state of perfect competition, since companies want to influence their market position and the quality of the products on offer varies.

Summary

  • the model does not exist in real terms but only theoretically
  • Market transparency is assumed
  • qualitatively identical goods are assumed
  • high number of providers and consumers is a requirement
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