So I'm taking Intro to Micro for my undergradute degree in economics. Of course the entire class is from the neoclassical perspective (which, at least, isn't the Keynesian one). I asked the teacher for some "clarification" on "perfect competition" (I didn't need clarification, I just wanted to talk with her about it). She claimed, as I expected, that perfect competition means individuals have no ("no" being different than negligible) effect on price in perfect competition. I sent a response, and was hoping you guys would judge it, see if I left anything worth including out (we have gotten to monopolistic competition yet, so i didn't really feel it necessary to talk about perfect elasticity and what not). Anyway, my repsonse was:
I can agree on small effect, but as for no effect, that doesn't make sense. If we are going to define the interrelations of demanders and suppliers as setting the equilibrium price, then (using, say, suppliers) any marginal increase (or decrease) in suppliers (or, more specifically, the total stock of a good), ceterus paribus, necessarily has to have an effect on the price. If the marginal increase did not, then this would contradict the law of supply. For the sake of argument, if it was possible that at some point the number of sellers was so numerous as to cause a marginal increase to have no effect, then there would still be the problem of identifying when this leap occurs. There is no objective criterion for defining the point at which a marginal increase of sellers has zero effect on price. Therefore, even if this was possible, the entire concept is a wild goose chase. It would not exist as a product of human action (since human action is purposive), but be a condition of the world, subject to the natural sciences. The only way an increase could have zero effect is if it was a general condition of human welfare (like air in most cases), but then it would not be a scarce good and not be subject to the task of economics and, similarly, would never have been supplied in the first place!
What do you think? Adequate? Too Softball?
*We haven't gotten to monopolistic competition yet. I meant to say have not in the original post.
I think that's actually pretty good. It seems to me that "perfect competition" was first advanced as only a theoretical construct to help in understanding the concept of economic equilibrium. But why was the latter concept advanced in the first place? I think the answer is because economics originally investigated conditions like the prices, quantities, and varieties of goods and services that exist. That is, economics set out to explain why those conditions are what they are. Austrian-School economists, starting with Menger, seem to have taken a radical departure from this methodology.
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