Micro Economics

Micro Economics

Micro Final

The concept of perfect competition was introduced by Adam Smith in his book “The Wealth of Nations.” Perfect competition is characterized by many firms selling an identical product, with none of the firms large enough to influence the price. A selling firm cannot affect the price of the product by producing more or less of the product. Each firm must accept the market price for the product.

Also in perfect competition, no single buyer is large enough to influence the market. No buyer can cause a change in price or demand by its own actions. For example, a large buyer cannot negotiate a better price by ordering a higher volume of the product. Nor can a buyer refuse to buy at the market price and hope to gain a better price through negotiation. The price is what it is, and nothing the buyer does will affect the price.

In addition, all products are identical or nearly-identical in the eyes of buyers, so that no seller of the product can raise the price. No vendor provides unique features, premium branding, or any other technique of gaining a niche and influencing buyers to buy its product versus products from other vendors. Furthermore there are no barriers to market entry in perfect competition. New firms can easily enter the market and begin selling the product, with no legal or technical barriers.

Finally, in perfect competition there is complete information about the product and it’s pricing. All buyers know which firms sell the product, at what price, and where. Also, all firms selling the product are motivated only by profit maximization.

While there are probably no real world examples of perfect competition, one can look at the Windows PC industry as something that has near-perfect competition. Perhaps the best example would be re-sellers of used older model Windows XP computers. There are tens of thousands of old PCs available for sale. One Windows XP computer is just about the same as another, in some sense. No one cares...

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