Term Paper on "Perfect Competition in Microeconomics"

Term Paper 6 pages (2002 words) Sources: 5

[EXCERPT] . . . .

Perfect Competition in Macroeconomics

Over the last several decades, the term perfect competition has been loosely thrown around by: economists and scholars. Simply put, this is when there is a fine equilibrium between the different competitors inside an industry. as, no company is able to: dominate a particular sector or their competitors. This allows for: the free flow of information, less barriers for new competitors to enter certain industries and large numbers of buyers / sellers. (Makowski, 2001, pp. 479 -- 535) Yet, beyond this basic definition there has been a shift in how this concept is applied and what defines perfect competition. Part of the reason for this, is because of the changes that have occurred in the economy. This meant that the way many business are reacting to customers have shifted, which is having an effect on how this basic principal is applied. To fully understand what has taken place requires: looking at specific examples of perfect competition and how this is changing. Together, these different elements will provide the greatest insights as to how corporations have been adjusting with this evolving definition.

Examples of Perfect Competition

According to Adam Smith (the father of modern day capitalism) he observed that, "The idea of competition could harmonize the pursuit of self-interest with economic efficiency." (Makowski, 2001, pp. 479 -- 535) This is significant, because this would form: the basic foundation of capitalism and the principal of perfect competition. Where, corporations will act in their own self-interest to deliver a particular product or service to the general public through increasing their profits. Over the years, the way that corporations are achieving this objective will vary from one business to the next. In some cases, you will have companies that will put their own self-interest above everything else. This will lead to them producing an inferior product and losing their customers to competitors. While at other times, this will translate into a company creating a new product or service that will revolutionize the industry. Once this takes place, it means that their business will begin to experience perfect competition.

A good example of this can be seen with iPod that was created by Apple in 2001. At the time, many people inside the music industry were: wondering how various record companies and the sector would adjust to changes from websites such as Napster. This allowed people the ability to share various songs with each other. The problem was that there were: numerous copyrights on these titles and it is illegal to be sharing this music with other people. However, despite this issue many consumers continued to engage in these activities. (Sugita, 2009, pp. 1 -- 49)

When Apple introduced the iPod, it was a way for them to be able to give consumers what they wanted at affordable prices. While simultaneously, allowing the new product to include many different state of the art features that were: user friendly and they could store entire libraries of the songs. This meant that someone could be able to: listen and find those songs that they liked the most. Over the course of time, these different features allowed the company to be able to: deliver a cutting edge product that a host of consumers demanded. (Sugita, 2009, pp. 1 -- 49)

The way that perfect competition existed is in: the manufacture and sale of the device. In this particular case, Apple outsourced 90% of the production of different parts to manufacturers in China and Japan. These companies were not concerned about their other trading partners. Instead, they were focused on meeting the nonstop demand for the product. This is important, because this focus on addressing these objectives; meant that a perfect competition situation existed at these different manufacturers. as, they were able to provide consumers with the product through: the component that they were producing. This allowed these companies to consistently increase their profit margins. While at the same time, they could not dominate their rivals (based upon the part that they were manufacturing). Once this occurred, it meant that these companies were experiencing perfect competition. This is significant, because it shows how these kinds of situations exist when there is tremendous demand for: a product and no single company can dominate the others. While the end product was controlled by Apple, the outsourcing for the manufacturing of various parts meant that these contractors would experience this concept as part of their business. (Sugita, 2009, pp. 1 -- 49)

A second example of perfect competition can be seen with Microsoft Windows. What happened was; the company's operating system was used by 90% of personal computers. This means, that they were experiencing tremendous amounts of demand from: buyer and sellers. While at the same time, the free flow of information and lack of barriers allowed many different competitors to offer their own operating systems (i.e. Linux and OS). However, Microsoft was able to capitalize off of this success, despite various legal challenges and other issues that they have been wrestling with. Evidence of this can be seen with the fact that: the company is one of the largest software firms in the world and they are offering a product that consumers will upgrade to. This is significant, because it shows how Microsoft was experiencing perfect competition. as, they have a product that is: in demand and one that consumers will continue to use. (Vickers, 2010, pp. 375 -- 392)

In this case, Microsoft was able to exhibit perfect competition. Yet, there is one variation that did not apply to this definition, as they were the most dominant software company in the industry. This occurred, over the course of time as the corporation was able to use the principals of perfect competition to help give them an advantage. At which point, their influence became apparent with the shifts in: the economy and the sector itself. This is important, because it is highlighting how perfect competition can exist at certain points in time. However, when changes begin to occur is when a corporation can move away from this definition. As far as Microsoft is concerned, they still are experiencing perfect competition with: the exception of their size and dominance in the industry.

How Perfect Competition is changing?

Perfect competition has been dramatically evolving over the last several years. Part of the reason for this, is because technology and the economy have been changing. This means that they way consumers are shopping and businesses are addressing their needs have transformed. Once this occurs, it is a sign that the underlying principals of perfect competition have shifted. as, you will see many companies that will fall into the basic definition, but the will evolve over the course of time. This is point that some kind of deviation will occur in the organization. Where, they will fall into the same category to a certain extent. Yet, they have become so large that they no longer fit in with this basic definition.

A good example of this shift can be seen in the world of banking. What has been taking place is that a host of organizations have perfect competition. as, everyone is able to: easily enter the industry, there is the free flow of information and lots of demand from consumers for a variety of products. On the surface this appears to be a way that many companies were able to increase their overall profit's, while addressing this growing demand. Yet, underneath it all, this basic model encouraged many of: the different banks, brokerage firms and other financial institutions to merge together. (Schaeck, 2010, pp. 35 -- 58)

This was taking place, because of various regulations that limited their size (such as: the Glass Stegall Act of 1933). Once these laws were repealed, this encouraged different firms to merge together; in an effort to address the needs of customers. However, as these companies were becoming larger, they began to move away from this basic definition. as, some firms become so large in size, that they became known as to big to fail. Once this occurred, it meant that many of these corporations often engaged in activities that placed their underlying business models at risk. Where, they began to take on: more leverage in an effort to keep up with rising demand. This increased their exposure to shifts in the economic cycle. as, this kind of thinking meant many holding companies would require: some kind of government bailout. (Schaeck,, 2009, pp. 51 -- 73)

When you step back and analyze what is taking place, it is obvious that many of these firms were experiencing perfect competition. However, because of the changes from globalization and improvements in technology, meant that that a shift occurred in their business model. as, more companies began to engage in actions that would increase their overall bottom line as much as possible. This meant that many of these organizations would quickly seek out other competitors that could help them increase their profit margins.

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