Does perfect competition exist?

Michael Levine, San Bernardino Valley College,
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Summary

In this exercise, students will discuss the reality or perfectly competitive markets. First students will consider the characteristics of a perfectly competitive market for goods and services and discuss how realistic these characteristics are, ranking them from most likely to exist to most farfetched. Next, students will look at some markets and discuss how close they are to perfect competition.

Learning Goals

  • Students will be able to discuss the characteristics of a perfectly competitive market.
  • Students will evaluate how well a market adheres to the characteristics of perfect competition.

Context for Use

This exercise is designed for an introductory microeconomics course. At this point students should have read or been lectured about a perfectly competitive market, and should understand the characteristics. This discussion should take 20-30 minutes and can be done in groups of no more than five students.

Overview

In this exercise, first students will consider the characteristics of a perfectly competitive market for goods and services and discuss how realistic these characteristics are, ranking them from most likely to exist to most farfetched. Next, students will look at some markets and discuss how close they are to perfect competition.

Information Given to Students

Does_PC_Exist?.docx (Microsoft Word 2007 (.docx) 14kB Jan28 20)

1) Consider the characteristics of a perfectly competitive market. The term perfectly in economics often refers to a hypothetical extreme that might not always exist in reality. Rank the characteristics of a perfectly competitive marketplace in order from most unlikely to be true in any market to most likely to exist.
A. Identical Products
B. Many buyers (in this context this means enough buyers that if you sell your good at the market price, all of your good will be sold without a surplus)
C. Many sellers (in this context this means enough sellers that one firm's actions will not disrupt the market equilibrium)
D. Perfect information (all buyers and sellers have all necessary information to make rational choices)
E. Free entry (anyone wishing to enter the market can enter)
F. Free exit (any firm wishing to shut down business can exit)

2) Take a look at the following list of markets. Rank them from most like a perfectly competitive market to least. For each market specifically discuss each of the characteristics of a perfectly competitive market in the context of that market, where do they adhere to characteristics, where do they differ.
A. Delivery Pizza
B. New Toyotas (retail market, as sold by the dealers)
C. Raw Brussel Sprouts
D. Bottled Water
E. Guided Walking Tours of New York

Teaching Notes and Tips

For the first question, your textbook may define perfect competition slightly differently, or perhaps you haven't included each of these characteristics. The instructor should feel free to edit the list of characteristics to better mirror the lessons/textbook.

For the second question it may be necessary to refine the specifics of the market to the class (That both national and local chains are in the pizza market, that bottled water refers to individual size bottled water, not for water coolers, etc.) This list was chosen to have markets that fall short in different ways, but many other markets could be chosen. Examples could include canned cola, white mens undershirts, #2 pencils, etc.

Assessment

The outcomes of this exercise could be joined with exercises or units on other market structures before giving the students the task to compare and contrast. A possible standalone essay question for an exam or assignment could ready, list the characteristics of a perfectly competitive market. Do you believe the market for Orange Juice sold at the grocery store is perfectly competitive? For each of the characteristics discuss whether the market for Orange Juice meets that criteria or falls short.