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Imagine yourself as a street food vendor, selling tacos topped with fried onions, ground meat, cheese, fresh tomatoes and dollops of guacamole and spicy sauce in the main plaza of a town close to the border of Mexico. There are three other taco vendors on the other corners of the plaza selling the exact same thing of the same quality. None of the other vendors (nor you) can change the price, because everyone knows that the deal is 3 tacos for $5. Anyone else who wants to sell tacos on the street can do so, and if you want to quit and sell something else one day (or sell your tacos at one of the many other public spaces in your town), no one is stopping you. A business expert might describe this as perfect competition (or a perfect market or pure competition), which means an equal level for all firms involved in the industry. But what does that really mean?
In order to attain perfect competition, several factors need to be met. The following list outlines some of the main factors:
Now that the factors have been introduced, you might be asking, what are the benefits to a perfect market? Let's look at some of the benefits in more detail:
This leads to the next question: Is perfect competition in a market realistic in the real world? The answer is no, not really. There aren't any 100% perfect markets, but there are some industries that come close. Like we mentioned earlier, street food vending (more common in developing countries) has many of the factors required of a perfect market. Agricultural markets are examples of nearly perfect competition as well. Imagine shopping at your local farmers' market: there are numerous farmers, selling the same fruits, vegetables and herbs. You can easily find out the prices for the goods, but they are usually all about the same.
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Another example is the currency market. First of all, the goods that are involved in the currency market are homogeneous. No matter where a dollar is traded, it is still a dollar. Not one buyer or seller can individually determine the price, and, with all of the technology available today, each buyer and seller has access to any current knowledge, or in this case, the current market value.
Most industries fall on the other end of the spectrum and are not even close to perfect competitions. Think about the cell phone industry. It seems like not a day goes by without a new commercial making its debut for the newest phone available. Bigger screens, higher quality cameras and new apps are just a few of the ways each firm is working to gain competition over other firms in the industry.
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Let's review. Perfect competition provides an equal level for all firms involved in the industry. Each firm has all of the knowledge pertaining to the goods, which prevents a monopoly, and each firm is free to enter and leave without any barriers. Lastly, in a perfect competition, profit can be maximized, and the goods are homogeneous. Like mentioned before, when all of these factors are met, a 'perfect' market occurs.
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Introduction to Business: Homework Help Resource25 chapters | 508 lessons | 1 flashcard set
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