Lesson 1, Topic 1
In Progress

1.4 Reasons for imperfect competitiveness are described with examples thereof

ryanrori December 22, 2020

[responsivevoice_button rate=”0.9″ voice=”UK English Female” buttontext=”Listen to Post”]

There is no such thing as a perfect market. The concept only exists in economist’s textbooks. The real market is as perfect as it can get if there is no government intervention in the market – why? Because in a free market the entrepreneur will ensure that markets stay in balance. Let us say in one market the price of a commodity is R30 per kg, the price of the same product is R20 per kg in another market and the price to transport goods from one market to another is R 4.00. An entrepreneur would immediately spot that money could be made by purchasing on the R20 market and selling on the R30 market and making a R6 profit after transport costs. This process is called arbitrage and forms the basis of all entrepreneurial activity. By doing this prices on the R20 market will tend to rise (because demand increases) and prices on the R30 market will come down (because supply increases) there will thus be a tendency for the markets to move closer together – the closest they will get (all other things being equal) however will be in the region of R23/27 (because of the R 4 transport costs).

Let us say there was a sales tax of R2 on the product, the closest the markets will get would be R22/28. So government intervention makes the market more imperfect. The same things happen across borders where one not only has to contend with import duties but also bureaucracy and other imposed impediments.