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: : Hi... : : anyone knows how to approach this ques: : : "Though the model of perfect competition may seem unrealistic when compared to real world experience, it does provide a useful tool with which to ess observed market behaviour and performance by firms." : : It's me term ignment and all help would be appreciated. Thanks : The model of perfect competition represents a situation where transactions costs are zero. Transactions costs are the costs of finding a trading partner and negotiating and enforcing the terms of exchange. If transactions costs were zero we would all enter into perfect transactions. Since it costs time to search for the best deals and it costs time to negotiate and enforce a deal we never reach a perfectly competitive equilibrium. The main questions are : I What institutions minimize transactions costs? : II Does the market process tend towards competitive equilibrium or move away from it? : III Is Government intervention a practical alternative to the market systrem? : AI Institutions such as money, common law courts, the Price system, and advertising tend to minimize transactions costs. IE- money reduces the inconvieniences of barter thus reducing transactions costs and facillitating trade. : AII The pursuit of self interest in the free market tends towards competitive equilibrium for exchange provided that property rights are fully defined and enforced and people are rational. Why? The laws of Supply and Demand work under the previously mentioned conditions. This is Smith's invisible hand of markets : AIII Government Policies and programs are not costless to implement and may suffer from many of the same defects of the markets IE high information costs. The costs and benefits of government intervention must be weighed carefully and comapred to the results of the market. : To put it simply, competitive equilibrium is the ideal situation that we would like to get to but cant . By having that as an ideal goal we can judge and compare different sets of institutions according to how close they bring us to it and optimal allocation of resources. : DWM Kean University

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