ShmoopTube

00:00

And finance Allah shmoop What is perfect competition people It's

00:08

true in the real world and nothing's perfect and markets

00:11

are no exception Perfect competition is a hypothetical market structure

00:15

one where no firms are undercutting each other and consumers

00:19

never get ripped off While perfect competition doesn't exist in

00:23

the real world it's a useful bar to compare other

00:25

market structures to something like Oleg Op Elise monopolies monopolistic

00:30

competition and other things of similar ilk There are five

00:34

key ingredients in the perfect competition Punch bowl one There's

00:38

no differentiation in goods and services I all firms they're

00:41

selling the same stuff within one market For instance in

00:45

order for the lemonade market on Maple Street to be

00:48

in perfect competition Jill Joe and Sammy would all be

00:51

selling the exact same kind of lemonade Same amount of

00:55

lemons sugar and water in each same colored cup In

00:59

reality though Jill's differentiated her product by making it raspberry

01:03

lemonade Joe has added extra sugar for the sweet tooth

01:07

crowd and Sami is playing the organic card when there's

01:11

differentiation in products that makes competition imperfectly Since firms air

01:15

signalling to customers why their specific product is preferable to

01:19

the other a similar ones This commonly seen type of

01:22

imperfect market structure a market selling differentiated products is called

01:27

monopolistic competition Okay too in perfect competition all firms are

01:32

priced takers That is when firms are priced takers they

01:36

are at the mercy of the price set by the

01:39

market in the Maple Street lemonade market While that would

01:42

mean Jill Joe and Sami's identical lemonades would all sell

01:45

for the same amount it's called one dollars Exactly If

01:48

Joe tried to raise the price of his lemonade to

01:51

a dollar and a quarter consumers would leave him entirely

01:55

and just go by Jill or Se Mi's lemonade instead

01:57

which would put Joe while pretty much out of it

02:00

Remember they're all selling the exact same stuff in a

02:03

perfectly competitive market In reality Joe is charging a dollar

02:07

and a quarter And while he's still in business Jos

02:10

clientele are willing to pay that extra quarter for that

02:13

extra sugar high And Sami's organic crowd followers are loyal

02:17

right his lemonades even more expensive than Jos at two

02:20

dollars But it sells just fine because Sami's consumers only

02:23

wanna buy organic will Jail still gets her fair share

02:26

of customers too because well there's a niche market for

02:28

raspberry lemonade These kiddos are all making their own prices

02:32

with their differentiated lemonade rather than being at the mercy

02:35

of the markets deemed price right total pure price takers

02:38

Next up Three buyers know all of the details on

02:42

products and prices in perfectly competitive markets That's how buyers

02:46

enforce perfect competition They'LL put anyone out of business by

02:49

not buying from them if they confined the same product

02:52

for a better deal elsewhere Think about how Joe would

02:55

run himself out of business if he was selling the

02:58

same lemonade as the others at a higher price Right

03:01

Remember that Well in the real world buyers don't have

03:03

perfect information We have what marketers tell us on they

03:07

may or may not be over selling their wares G

03:10

What marketer doesn't lie to you And we have things

03:12

like online reviews you know many of which are fake

03:15

And then we have recommendations from friends and we have

03:18

yelp We can comparison shop products and their prices In

03:22

reality Thank you Internet With all the technology we have

03:25

nowadays well it's given us access toe wave or information

03:28

than ever before And it's also given us access to

03:31

more products and services than ever before right Okay so

03:34

moving on number four In a market with perfect competition

03:37

there are no barriers to enter and no barriers to

03:40

exit the market In the lemonade market Any kid could

03:43

open up a lemonade stand with essentially no startup costs

03:46

And if the market was too competitive while any kid

03:49

would close their lemonade stand without worrying about trying to

03:53

stick it out you know since they already had bought

03:55

all their lemonade making paraphernalia When markets are easy to

03:59

enter and exit keeps firms as price takers they're at

04:02

the mercy of the market If the lemonade kids air

04:05

you know business owners created in Olongapo Lee deciding to

04:08

collude on price wealth new lemonade stands would pop up

04:11

and an undercut their plan Like for example if Jill

04:14

Joe and Sammy all agreed to sell their identical lemonade

04:17

at Buck fifty instead of buck wealth and new kids

04:20

on the block Jake Jordan and Sarah might all open

04:23

their own lemonade stands being competitors charging one dollars per

04:27

drink instead of that buck Fifty Guess what Well then

04:30

Jill Joe and Sammy would then either have to lower

04:32

their prices back to a dollar or they go out

04:35

of business Right Number five There are only small firms

04:38

and perfectly competitive markets Definitely no oligopolies monopolies or uh

04:43

well Amazon which would mean Jill Joe and Sammy all

04:45

have a small share of the regular old lemonade market

04:48

There's no dominant player in the real world Firms are

04:51

incentivized to grow since it usually means they can benefit

04:54

from increasing returns to scale making more with less So

04:58

for example in the real world Jill's Raspberry Lemonade is

05:01

able to sell at a lower price because she owns

05:03

about half of the lemonade market on Maple Street But

05:06

in actuality Jill ran Jeannie's raspberry lemonade stand out of

05:10

business because while Jill was selling her raspberry lemonade at

05:13

a lower price than Jamie could afford Teo make hers

05:16

You know like how Wal Mart Target Costco and other

05:19

big corporations ran their smaller mom and pop shop competitors

05:23

out of business When there are a few firms or

05:25

one big one in a market it's typically when they

05:28

become old apples or monopolies which makes them Franks makers

05:31

instead of price takers right So to recap perfect competition

05:34

is hypothetical market structure where one there's no differentiation in

05:38

products to firms are priced takers not makers Buyers have

05:41

complete information There are no barriers to enter or exit

05:45

the market as a seller And five all firms are

05:48

small and modest Commodity markets like grain and oil are

05:51

the closest things we have in real life too Perfect

05:54

competition There's not too much differentiation happening there and buyer

05:57

information is more complete in those markets than in most

06:00

We can use the concept of perfect competition to analyze

06:03

what's happening in imperfectly competitive markets And you know the

06:07

rationale behind all that while perfect competition sounds great for

06:10

consumers since it prevents price setting by firms of the

06:13

real world isn't all that bad Differentiation is great We

06:16

wouldn't have Coke and Pepsi and rotten Apple otherwise and

06:19

economies of scale can make prices even lower than before

06:22

A world with complete information would be also nice but

06:25

sometimes life hands you lemons and well you've got to

06:27

know how to squeeze the juice out of them So

06:29

good luck with that

Full Transcript