Tuesday, October 28, 2014

Seven Basic Conditions for Perfect Competition and a Complete System of Markets

     1. MOBILE FACTORS OF PRODUCTION WITH EQUAL ACCESS: The factors of production (land, labor, and capital) are perfectly mobile in the long run (and mobile despite barriers to trade), and equal access to them is enjoyed.

     2. SUFFICIENT FIRMS, AND MANY BUYERS AND SELLERS: There are no increasing returns to (economies of) scale (i.e., there are enough firms in each industry); a polyopoly-polyopsony exists (i.e., there are many buyers and many sellers); and there is no market power (or power to purchase and determine price), such that each participant is a price taker and no participant influences the price of the product it buys or sells.

     3. INTERCONNECTED MARKETS, AND HOMOGENOUS AND FUNGIBLE PRODUCTS: Any agent can trade any good for any other – directly or indirectly – with any other agent. Goods and services are perfectly homogenous substitutes for one another, their qualities and characteristics not varying between different producers and suppliers.

     4. PERFECT INFORMATION, RATIONAL BUYERS, AND PROFIT MAXIMIZATION: All consumers and producers are assumed to have perfect knowledge of products' production methods, quality, price, and utility; buyers are assumed to be capable of making rational purchases based on information given; and firms are assumed to sell where marginal costs meet marginal revenue (in order to maximize profit).

     5. NO FRICTION, NOR BARRIERS TO ENTRY AND EXIT: Transaction within markets, and entry into and exit from markets, all occur without any barriers or fees of any kind. No friction exists; the complete set of possible bets on future states-of-the-world can be constructed with existing assets (not speculative or leveraged assets) without friction.

     6. INSTANTANEOUS PRICE ADJUSTMENT: The adjustment of supply and demand to one another, and the calculation of price, are instantaneous, rather than slowed, delayed, or inhibited.

     7. PROPERTY RIGHTS, AND NO EXTERNALITIES: Property rights (including buyers' rights, and concerning what is to be sold) are well-defined. No externalities, which effect third parties, occur (whether positive or negative, intentional or unintentional).