In economics, specifically general equilibrium theory, a perfect market is defined by several idealizing conditions, collectively called perfect competition. In theoretical models where conditions of perfect competition hold, it has been theoretically demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded 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.
What is an ‘Imperfect Market’
An imperfect market refers to any economic market that does not meet the rigorous standards of a hypothetical perfectly (or “purely”) competitive market, as established by Marshellian partial equilibrium models. An imperfect market arises whenever individual buyers and sellers can influence prices and production, or otherwise when perfect information is not known to all market actors.
Explaining ‘Imperfect Market’
All real-world markets are theoretically imperfect, and the study of real markets is always complicated by various imperfections. For example, traders in a financial market do not possess perfect or even identical knowledge about financial products. The traders and assets in a financial market are not perfectly homogeneous. New information is not instantaneously transmitted to all actors, and there does not exist an infinite velocity of reactions thereafter. Economists only use perfect competition models to think through the implications of economic activity.
Perfect Markets Can Never Exist
No serious economists believe that a perfectly competitive market could ever arise, and very few consider such a market desirable. No market can ever have an unlimited number of buyers and sellers. Economic goods in every market are heterogeneous, not homogeneous, as long as more than one producer exists. Diversity of goods and diversity of tastes are preferable aspects of imperfect markets.
Implications of Imperfect Markets
Not all market imperfections are harmless or natural. Situations can arise in which too few sellers control too much of a single market, or when prices fail to adequately adjust to material changes in market conditions. It is from these instances that the majority of economic debate originates.
Imperfect Market FAQ
What are the examples of imperfect market?
What are the two types of imperfectly competitive markets?
What is monopolistic competition market?
What are the 4 characteristics of oligopoly?
What is an example of imperfect competition?
What are the types of imperfect competition?
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- International capital mobility and crowding out in the US economy: imperfect integration of financial markets or of goods markets? – www.nber.org [PDF]
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- Financial market integration and macroeconomic volatility – www.jstor.org [PDF]
- Equilibrium in an Imperfect Market: A Constraint on the Number of Securities in the Portfolio – www.jstor.org [PDF]
- Exchange rates and foreign direct investment: an imperfect capital markets approach – academic.oup.com [PDF]
- Saving behaviour under imperfect financial markets and the current account consequences – academic.oup.com [PDF]
- On the positive role of financial intermediation in allocation of venture capital in a market with imperfect information – onlinelibrary.wiley.com [PDF]
- Stochastic dominance with a riskless asset: An imperfect market – www.jstor.org [PDF]