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"If real world markets can be made to resemble more closely the model of perfect competition, economic efficiency will improve." Explain why Perfect competition is generally regarded as economically more efficient?

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Chris Simons "If real world markets can be made to resemble more closely the model of perfect competition, economic efficiency will improve." a) Explain why Perfect competition is generally regarded as economically more efficient? (20 marks) The model of perfect competition describes market where there is a high degree of competition. The word "perfect" does not mean that this form of competition produces ideal results or maximises economic welfare in other words, the word "perfect" should not have any normative overtones. A perfectly competitive market must possess four characteristics. Firstly, there must be many buyers and sellers in the market, none of whom is large enough to influence price. Buyers and sellers are said to be price takers. This type of market has many relatively small firms that supply goods to a large number of small buyers. There must be freedom of entry and exit from the industry. Firms must be able to establish themselves in the industry easily and quickly. Barriers to entry must therefore be low. If a firm wishes to cease production and leave the market, it must be free to do so. Buyers and sellers possess perfect knowledge of prices. If one firm charges a higher price than the market price, the demand for its product will be zero as buyers buy elsewhere in the market. ...read more.


The welfare loss is the shaded triangle. Therefore it is clear that perfect competition is economically more efficient as it produces a lower price with higher output, whilst the industry is very stable, with no firms making abnormal profits and none making losses. Both consumers and suppliers are totally satisfied by the situation they are in and it will continue unchanged without any difficulty. b) Assess the extent to which developments in information technology, such as the Internet, are making markets more competitive. (30 marks) The Internet is a global network. It is instantly accessible, easy to use and becoming more and more available to households all over the world. Its creation has brought great scope for increased competition between firms. It increases not only the breadth and depth of the competition, but also gives people the ability to shop from their own home; something that many will see as its most useful feature. Firms can now compete on every aspect of their business, price, quality, customer service, delivery time, availability and also a new feature in security. Not only does it do this between the "normal" market for a firm, its local, competing stores but a worldwide competition with firms perhaps on the other side of the globe and this means firms must be far more efficient if they are to survive. ...read more.


we have 6 they're just here sir", or "no we don't but I can tell you which of our stores in this area do have any in stock." Than if they say, "I'll just go and have a look out the back sir" and ten minutes later return to tell you they do not, and they have no idea when they will be receiving some, and that they don't know where else has any. Computerised stock control systems have enabled firms to be the former of these two. This has increased competition in the sense that firms must compete to maintain their customers loyalty. So, in conclusion I will say that whilst there is great prospect for information technology, particularly the Internet, to drastically increase competition worldwide, there is no evidence that this "revolution" has happened yet, or will happen within the short-term future. When it does happen, there is a chance all the smaller, local business will be put out of business by the reduced prices of the Internet competitors, and so competition will actually stay the same, just the medium for purchasing may have changed. As for computerised stock systems, these seem to have become the normal amongst almost all High Street Stores and so whilst it may have increased competition to begin with, it now has minimal effect. 2,222 words. ...read more.

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