Perfect Competition

To claim that something is "perfect" is to say that it cannot be done better. Perfect competition’s theory is a well worked out theory that has been around the world for over a century. Unfortunately, the theory of perfect competition is nonsensical when applied to an economy of a country. Let me explain why this theory is nonsensical. First of all, let me define the meaning of perfect competition. Perfectly competitive markets are defined by two main characteristics: the first characteristic is the goods being offered for sale are all the same which is also known as homogenous product and as a result buyers have no preference between one sale and another; and the other characteristic is the buyers and sellers are so numerous that no single buyer or seller can influence the market price.  Because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be price takers. Besides that, in perfectly competitive market, there are no barriers to entry. There must be free entry to and exit from the market. If the industry is making profits, then new firms will enter the market. Otherwise, some firms will leave the market. No restriction is imposed in perfectly competitive market.

But the fact is in real world situation, there are no examples for a real perfect competition or for anything close to that, because no producer wants to position themselves in perfectly competitive market. Producers cannot expect to make any profit in this market. Perfect competition is achieved when a particular industry have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no impact on the price at which its product is sold. Firms maximize its profit by giving big discount to attract consumer to buy their products, claiming that their product is better than the other and etc. According to perfect competition theory, sellers and buyers cannot determine the market price themselves. This is the characteristic that do not like by all the producers. This can be said that the main reason why perfectly competitive market is nonsensical in real world.

For example, agricultural markets particularly up through the beginning of the 20th century, were viewed as being close to a real-world version of a perfectly competitive market. But as the technology is keep on growing now, farmers can grow their crops much faster and much better and the quantity and the cost used to produce the crop differs for each farmers. In this situation, agriculture cannot become a perfect competition anymore.

In conclusion, we can know that there are no perfectly competitive markets in the real world.  However, in our fast changing world, the choices of products and services available to consumers, the technologies for producing those products and services, and the costs involved in production are rapidly changing. Before market forces can begin to gel to create price competition and firms can modify their operations to copy the most successful sellers, changes in circumstances may stir enough such that the market formation process starts newly again and make no way for perfectly competitive market.