In economics, a perfect market is defined by several conditions, collectively called perfect competition. Among these conditions are
- Perfect market information
- No participant with market power to set prices
- Non intervention by governments
- No barriers to entry or exit
- Equal access to factors of production
- Profit maximization
- No Externalities
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.
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.
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.
Famous quotes containing the words perfect and/or market:
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There is none like the Boy that sold Broom, green Broom.”
—Unknown. Broom, Green Broom (l. 23–24)