Seduced by Terminology

Markets Are Not Magic

In order to work their efficiency magic, markets need very special conditions to be present. There must be full information available to all participants. Product quality, locations and prices of alternative suppliers, every relevant piece of information must be known. Not quite sure if the wine is good or not? That's an information problem. Not sure if the used car has problems? Don't know where any gas stations are except the ones beside the freeway in a strange town? No way to monitor the quality of the building built in Iraq with U.S. aid? No way to be sure if consultants are worth the amount they are being paid? Information problems are common and they can cause substantial departures from the perfectly competitive, ideal outcome.


'Perfect Competition' is neither realistic nor ideal, but is merely descriptive terminology for a particular grossly simplified economic model. The only information that an entrepreneur needs is the price of inputs vs the price of the output and the know how involved in combining the inputs into the output while attempting to earn an uncertain profit.

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