Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Perfect Competition Assumptions The assumption of perfect competition is a concept in economics that is used as the basis for many economic models and economic analysis. This assumption suggests that a market is considered a perfectly competitive market if the market has the following characteristics: 1. Multiple Buyers and Sellers: A perfectly competitive market must have many buyers and sellers, so that no one party can influence the market price. 2. Homogeneous Products: The products offered in the market must be homogeneous or similar to one another so that consumers do not have a significant preference for certain products and sellers cannot charge higher prices for their products. 3. Transparency: Information relating to price and product quality must be easily accessible and understandable to both buyers and sellers. 4. Easy Market Entry and Exit: A perfectly competitive market should be easily accessible to new buyers and sellers, so that there are no barriers to enter the market and compete. These assumptions are important because they help shape some economic models, such as the perfect competition model, where they make the model very simplistic and provide analytical results that can be applied to real-world markets. However, markets that are truly perfectly competitive are rarely found in the real world. Under the assumption of a perfectly competitive market, some of the market characteristics that are defined are: 1. Atomicity (Market justice) A perfectly competitive market must consist of many small buyers and sellers, who have no market power to influence prices. 2. Homogeneity Products offered in the market must be uniform and not different from one another. 3. Perfect Information All buyers and sellers must have access to complete and accurate information about price, quality and resources. 4. Mobility (Mobility factors of production) Factors of production (capital, labor and natural resources) must be free to move between sectors and there are no obstacles. 5. Zero Transaction Costs Costs associated with buying and selling transactions (such as transportation costs, negotiation costs, and administrative costs) must be zero. These assumptions provide the basis for perfect competition models in economic and public policy analysis. However, in practice, it is very rare for a market to meet all of these assumptions. Therefore, economic analysis also considers imperfect market models, such as oligopoly or monopoly, which allow buyers or sellers to have market power and influence prices. The perfect competition market also assumes that all market participants have the same information about the price and quality of the goods or services offered. That is, no party has access to better or more complete information than the other party. Under these conditions, all market participants can make rational decisions based on the same information. However, in reality there is often an information imbalance between market participants. There are certain parties who have better access or information compared to other market participants. This can result in unfairness in the market, where those with better access or information can use it to gain greater profits. The perfect competition market also assumes that factors of production such as labour, capital and natural resources can move easily between industries and between regions. Under these conditions, the market will reach a long-term equilibrium where profits in each industry will be the same and there will be no incentive for market participants to switch to other, more profitable industries. However, in reality, the mobility of factors of production is not always easy and cheap. There are several factors that limit the mobility of factors of production such as special skills that are only suitable in certain industries, remote geographical locations, and high costs for moving. Perfect competition market also assumes that there are no external effects caused by economic activities. That is, economic activity only has an impact on market participants who are directly involved in the activity and does not have an impact on other parties who are not involved. However, in reality, economic activities often have broader impacts and can affect other parties who are not directly involved. An example is pollution generated by factories or transportation, which can have a negative impact on the environment and the health of the surrounding community. This can result in external costs that are not accounted for in market prices.