In a ‘perfectly competitive market’, a large number of perfectly informed consumers and firms buy and sell a standardized good without being able to influence its price. All agents are free to enter the market, and all can vote with their feet by leaving it. When these conditions are met, welfare analysis can easily demonstrate that economic surplus is maximized. This ideal situation can then be used as a benchmark to analyze various existing deviations from competitive conditions. The existence of market power is an important case in point. (Ahuja, 2010)
The perfect competition is enough but not important for efficient in economically perfect market. It implies that there are other efficiencies also in the market. The core component of perfect competition is that the consumers will survive and multiply but also tend to contract and become less. (Dominick , 2012) The efficient market becomes efficient because the equilibrium is present with demand, price and supply being equal. The demand side forces the buyers to get a good at the maximum price that they are ready to pay. The demand price is the value paid by the society upon the level of satisfaction they receive. The competition on the supply side forces sellers to offer the minimum supply price. It includes the opportunity cost of production, which also includes the value of goods not in the production. (Matthew, 2009)
In a modern economy, the entire system of exchange is too complex and it requires the incentives that drive the economy to economic efficiency. Competition promotes efficiency as long as the private and social interests are not in conflict. However in certain cases, there is no possibility of economies of scale. When there exists a perfect competition there are undifferentiated products and thus, there are very little options available. (Partha, 2007) The lack of extra profit affects the R & D. In Real market, the perfect competition is not a possibility and is more of a theoretical concept and not practical. The capitalist and non-perfect market competition is taken as evil in itself as it causes income differences. It also gets blame for government corruption. In the long run, perfect competition gives the optimum level of economic efficiency. In comparison, perfect competition is less prone to market failure. (Lipsey, 2012)
H. L. Ahuja, 2010. Macro Economics: Theory and Policy. Edition. S Chand & Co Ltd.
Lipsey, 2012. Economics. Edition. Oxford University Press.
Matthew Bishop, 2009. Economics: An A-Z Guide (Economist A-Z Guide). Edition. Economist Books.
Dominick Salvatore, 2012. International Economics: Trade And Finance 10th Edition. Edition.
Partha Dasgupta, 2007. Economics: A Very Short Introduction. Edition. Oxford University Press.