Perfectly Competitive Economy: Assumptions and Equilibrium
You have studied the perfectly competitive economy. You know the conditions needed for perfect competition to exist. You understand how individual decisions move the economy to equilibrium. You know what a Pareto efficient equilibrium means, and what it does not.
You have also thought about what you consider fair in an economic system, and whether the competitive equilibrium meets your standards for an equitable distribution of society’s resources and wealth.
Pull this information together. Write an essay explaining and evaluating the perfectly competitive economy.
Your audience is unfamiliar with economic theory. Make sure your essay clearly explains
• The assumptions behind perfect competition
• How the economy reaches equilibrium
• What ‘Pareto efficient’ means and what it does not
Then evaluate the perfectly competitive model. In this section of the essay, focus on the issues most important to you. Some possible questions to address:
Are the assumptions realistic? Does perfect competition allocate resources correctly? Is the perfectly competitive outcome fair?
Conclude with your opinion of the perfectly competitive model. What role should this idea play in society?
Length: 6-7 pages
Due Dates
1 st draft (outline): due Friday, March 3, 2023, at class time.
2nd draft (full draft): due Friday, March 10, 2023, at class time
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The Perfectly Competitive Economy
Introduction
The perfectly competitive economy is a theoretical model of explaining a market where no one has enough power to control the price of a product. In such cases, the market sets the price of goods and services based on how much people want to buy and how much sellers are willing to sell (Davis and Orhangazi). In the long run, such a market can achieve a state of balance, where the price is the most efficient use of resources, and everyone who wants to buy the product at that price can do so. Therefore, the perfectly competitive economy model is a useful economic theory that provides an easy way to understand how markets work and how prices are determined.
Assumptions in a Perfectly Competitive Economy
For the perfectly competitive economy model to work, there are several assumptions that are made. This means that it is assumed that there are many buyers and sellers available in the market, there are many firms or people producing or selling similar products, the market has complete and easily accessible information, and there is free entry and exit from the market (Goodwin et al. 371). These assumptions ensure that the market is competitive and efficient and that prices are determined by supply and demand. These assumptions enable the perfectly competitive economy to provide a useful benchmark for evaluating real-world markets and identifying areas where improvements can be made to ensure that resources can be allocated efficiently.
The first assumption on a large number of buyers and sellers highlights that a perfectly competitive economy should have several buyers and sellers, none of which have a significant market share. As a result, no buyer or seller can influence the price of the product, and the market becomes a price-taker. On the other hand, a smaller number of buyers or sellers can lead to possible collusion in price setting or the possibility of a dominant seller charging higher prices without fear of losing customers due to the market monopoly (Goodwin et al.). Consequently, the presence of many buyers and sellers is crucial since it ensures the market is competitive and efficient.
Apart from that, another assumption states that the market should have a huge number of homogeneous prod...