In neoclassical economics, perfect competition is a theoretical market structure in which five economic factors must be met. Neoclassical economists claim that🅘 perfect competition would produce the best possible🍃 economic outcomes for both consumers and society.

However, perfect competition is theoretical: it doesn't exist in the real world. Outside of the realm of theory, there are many significant obstacles that prevent perfect competition from existing in any real industry.

Criteria for Perfect Competition

There are five criteria that must be met in ꦑorder for a market to be considered perfectly competitiv𒈔e.

1. All firms sell an identical product.
2. All firms are 澳洲幸运5官方开奖结果体彩网:price-takers.
3. All firms have a relatively small 澳洲幸运5官方开奖结果体彩网:market share.
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.

All real markets exist outside of the perfect competition model because it is an abstract, theoretical model. In the real world, it is impossible for all five criteria to be met exac🍰tly.

Barriers to Perfect Competition

There are many barriers that prevent perfect competition from existing. For example, one of the criteria for a market to experience perfect competi꧟tion is that all firms must sell an identical product.

Theoretically, this should be easy to achieve. But in reality, most products have some degree of differentiation. Even with꧅ a product as seemingly simple as bottled water, producers will vary in their given method of purification, product size, and brand identity.

澳洲幸运5官方开奖结果体彩网:Commodities—such as raw agricultural products—come closest in terms of firms offering identical products, although products can still differ in terms of their quality. In a market where products are close to identical, such as the commodities market, the industry tends to become concentrated into a small number of large firms, a type of market structure called an 澳洲幸运5官方开奖结果体彩网:oligopoly.

Another characteristic of an industry that experiences perfect competition is the freedom of entry and exit. In the real world, however, many industries have significant 澳洲幸运5官方开奖结果体彩网:barriers to entry. High 澳洲幸运5官方开奖结果体彩网:startup costs or strict 澳洲幸运5官方开奖结果体彩网:government regulations may limit t🐼he ability of firms to enter and exit industries.

Another criterion of perfect competition is full consume🐲r awareness of all products and their prices. This is virtually impossible to achieve in a global economy. While consumer awareness has๊ increased as more people seek out and research information online, there are still few industries where the buyer remains aware of all available products and prices.

An online search for something as simple as a sofa, for example, produces thousands of options from manufacturers and sellers all over the world. It is impossible for any one consumer to be informed about all these products and prices.

Perfect Competition and Neoclassical Economics

Neoclassical economists believe that perfect competiಌtion creates a perfect market structure, with the best possible economic outcomes for both consumers and society. In general, though, they do not claim that this model is representative of the real world.

This has led to debates about whether or not perfect competition should be used as a theoretical benchmark for real economic markets. Neoclassical economists argue that perfect competition can be useful as a tool for analyzing and comparing the behavior of real markets to theoretical ones. Most of their analysis stems 🍰from its principles.

Many other smaller schools of economic thought disagree that perfect competition is a useful model and question whether or not–if it could be executed in real economic markets–it would p꧃rovide positive economic outcomes for consumers and businesses.

Critiques of Perfect Competition

Some economists are highly critical of the neoclassical school's reliance on perfect competition. Critics of perfect competition can be broadly separated into two groups. The first group believes the assumptions built into the model are so unrealistic that the model cannot produce any meaningful insights. The second group argues that perfect competition is not even a desirable theoretical outcome.

For example, the Austrian economist and winner of the Nobel Prize for Economics in 1974, Friedrich Hayek, argued that perfect competition had no claim to be called "competition." In his critique of perfect competition, Hayek claimed that the model removes all competitive activities and reduces all buyers and sellers to mindless price-takers. Hayek's contributions to the field of economics were informed by the 澳洲幸运5官方开奖结果体彩网:Austrian school of economics.

The economist 澳洲幸运5官方开奖结果体彩网:Joseph Schumpeter, also part of the Austrian school of economics, noted that research, development, and innovation are undertaken by firms that experience economic profits, rendering perfect competition less efficient than 澳洲幸运5官方开奖结果体彩网:imperfect competition in the long run.

The Bottom Line

Perfect competition is a theoretical market structure in which five criteria are met: all firms sell an identical product, are price-takers, and have s🌞mall market share; buyers are informed about all products and prices; and there are no barriers to entering or exiting an industry.

Neoclassical economists claim that perfect competition would produce the best possible economic outcomes for both consumers and society. However, perfect competition doesn't exist in the real world. It is impossible for any real market to meet its criteria. Critics of the theory of perfect competition claim that this makes it unhelpful as a tool for gaining insight into real economies.