Limitations of Perfect Competition

[savio13]

1. Unrealistic Assumption: All the assumption on which a perfectly competitive market is based on are unrealistic ones. Even if we take a village or a local market, still many assumptions remain impractical. Therefore, perfect competition is considered as a theoretical abstraction, impossible to apply to practical situations.

2. Principles are not applicable: Perfect competition model derives many principles for the operation of a firm. For example, equilibrium production is decided at a point where MC = MR. In reality most of the business people are unaware of this rule, and if aware, they either do not or cannot apply it.

3. Time Period: A firm operates in the short –run and if it survives settle down in the long – run. Alfred Marshall, himself admitted the absence of a clear cut distinction between the two periods. At any rate they cannot be measured by calendar years. It is highly difficult for a firm to decide that its time adjustment is over and it is time for it (long run) to settle down.