A perfect market is a theoretical concept in economics where perfect competition exists, and no market player can influence the price of any product. It is used as a benchmark for real-world markets and to explain economic principles. However, it is disputed among economists, and no real market is perfect.
A perfect market is a concept in economics, primarily in neoclassical economics, that refers to a market with what is known as perfect competition, a set of conditions in which no market player has the power to influence the price of any product that buy or sell. In such a market, the forces of supply and demand will produce an equilibrium where the supply and demand for each commodity is exactly matched by the existing price. True perfect competition can only exist under a number of conditions that are not possible in the real world, and therefore there are no perfect real markets. The concept is used in economics, not to describe any real-world state of affairs, but as a construct to simplify thought experiments on how economies work and provide a benchmark against which real-world markets can be compared.
It is important to note that perfect market and perfect competition are not moral judgments. Market efficiency is a separate issue from the justice or expediency of that market’s processes or outcomes. In this context, calling something perfect means that it is an ideal concept used to simplify experiments or thought calculations. It is similar to concepts in physics such as a perfectly rigid body, which means an object which is absolutely unaffected by the application of forces and which never undergoes deformation under any circumstances or a perfect black body, which refers to an object which completely absorbs all incoming electromagnetic radiation. No real material has these attributes, but they can be used as mental constructs to think about a scientific field.
There are a number of conditions necessary for a perfect market. The number of buyers and sellers is extremely large or infinite, making it impossible for any market participant to influence market prices. Furthermore, all products sold in each market are completely homogeneous from one supplier to another and firms can enter and exit the market freely. All producers make normal profits, which means that their revenues equal their opportunity costs. All market participants also possess perfect information about the economic factors relevant to their decisions and are assumed to act rationally to maximize their utility. Finally, all trade can be transacted without transaction costs, and all factors of production – labour, capital and natural resources – are perfectly mobile and can be moved to new uses in response to market conditions at no cost.
A perfect market produces a situation called Pareto efficiency or Pareto optimality, named for the economist Vilfredo Pareto. This means that it is impossible to change the distribution of goods to make a person better without simultaneously making them worse. This is because, in the equilibrium created by perfect competition, all possible mutually beneficial trades have been made. No real market is like that, of course, but many economists use the idea as a way to explain economic concepts or because examining how and why a real market differs from a perfect market can help explain how it works.
The concepts of the perfect market and perfect competition are used extensively in modern neoclassical economics, the dominant school of modern economic thought, but their role and importance are disputed among economists. Many economists see these concepts as a way to identify areas where market processes can be improved through government intervention or other changes. Others view them as a useful thought experiment that helps explain economic principles but disputes their value as a guide for judging the effectiveness of real-world markets or improving them through government policy, since many real-world markets function well despite their deviation from model of perfect competition. Some economists and schools of economic thought reject the perfect market model outright, generally arguing that the model’s assumptions leave out factors too essential to be eliminated, such as imperfect information and the functioning of market processes over time.
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