Competition is a favourite word for economist, and one which has a very specific definition. When used bu itself, competition refers to a pure situation-more formally called perfect competition. Here, there are four conditions necessary to produce a perfectly competitive structure :
1) A market place made up of many buyers and sellers, each buying or selling just a tiny fraction of the particular product being bought and sold.
2) A product that is homogeneous: that is, the product sold by any one firm is distinguishable from the products sold by other firms.
3) An economic situation that permits would-be sellers to set up shop, and current sellers to close up shop, with relative case.
4) Good information and communication so that all buyers and sellers are informed about prices and sources of supply.
Consider, for example, the soybean industry, which is very close to being perfectly competitive. Millions of farmers produce and sell soy to millions of buyers, the soy is pretty much the same no matter who grows it, farmers can grow soy one year and wheat the next, and information on prices is easily attainable.
Taken together, all these conditions create a situation in which no body has control over prices. Both sellers and buyers must do business at whatever prices is determined by the market, the price that result when all the farmers and all consumers get together. A farmer cannot charge more for her soybeans than her neighbour does and still find willing buyers, and a buyer cannot offer less than other buyers do and still find willing sellers.
Competition, as outlined above, is hardly a situation jampacked with excitement and intrigue. No clever advertising campaigns for Brand X soy no corporate battles between farmers A and B. Indeed, one might wonder how the notion of competition came to be so firmly associated with capitalism, with firm slugging it out and rewards going to the toughest or brightest.
Well, the answer is that perfect competition is hardly the way of the real world. Capitalism is more correctly associated with the terms imperfect competition or monopolistic competition, terms that describe market structures that do not meet those four, somewhat ideal, conditions.
Typically, for example, sellers can distinguish their products by using packaging and advertising to convince buyers that Brand X beer is not only different from Brand Y, but better-higher quality, snappier taste, or preferred by glamorous people. Sellers who are able o differentiate their products can, in turn, exercise some control over prices. Beer drinkers might be willing to pay more for a brew consumed by hunky he-men.
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