Perfect market

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In economics, a perfect market is defined by several conditions, collectively called perfect competition. Among these conditions are

The mathematical theory is called general equilibrium theory. On the assumption of Perfect Competition, and some technical assumptions about the shapes of supply and demand curves, it is possible to prove that a market will reach an equilibrium in which supply for every product or service, including labor, equals demand at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.[1]

Share and foreign exchange markets are commonly said to be the most similar to the perfect market. The real estate market is an example of a very imperfect market. Note that the conditions for Perfect Competition mean that a perfect market cannot be unregulated, since these preconditions for market function cannot at the same time be products of the market, yet must be provided somehow.[citation needed]

Another characteristics of a Perfect Market is normal profits, just enough to induce enough participants to stay in the market to satisfy customer demand. The least efficient producer may have very small profits, and be unable, for example, to pay dividends to shareholders, while more efficient producers have larger profits.

This attribute of perfect markets has profound political and economic implications, as many participants assume or are taught that the purpose of the market is to enable participants to maximize profits. It is not. The purpose of the market is to efficiently allocate resources and to maximize the welfare of consumers and producers alike. The market therefore regards excess profits, or economic rents, as a signal of inefficiency, that is of market failure, which is to say, not achieving a Pareto optimum.

References[edit]

  1. ^ Gerard Debreu, Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press, New Haven CT (September 10, 1972). ISBN 0-300-01559-3

Another attribute of the perfect market is even the market is operating at zero profit it is operating at the efficient scale (otherwise the firm will not be able to stay in the market). It is the market that provides the premium social benefits to the whole society.

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