Question

Many economists believe the strict definition of perfect competition does not exist in real world. Yet, this model is the point of departure in discussing the market structure. Discuss why.

Answer 1

The assumptions of perfect competition are a large number of buyers, a large number of sellers, price taking buyers and sellers, no market power of buyers and sellers, homogenous products, and lack of any entry or exit barrier. None of these assumptions can be strictly found in real life markets. However, perfect completion is an ideal economic case, which maximizes the efficiency of the market. Perfect competition is an ideal case in which the invisible hand of the market is in free play in allocating resources. Other forms of markets are more inefficient forms of the market. Therefore, while studying market efficiency, we start from the case of perfect competition which is an ideal case.