PERFECT COMPETITION MARKET
PerfectCompetition Market: Foreign Exchange
Unit
A perfectly competitive market is one of the most rare marketstructures characterized by the presence of many buyers and manysellers. Other conditions necessary to achieve a perfectlycompetitive market include freedom of entry and exit requiring lowinitial capital, production of homogeneous products by all firms,unrestricted access to information, and all firms are price takers.The market may also call for minimal government control since someinterventions by governments such as subsidies may influence themarket. For instance, subsidies lowers costs to farmers andsubsequently the price of goods or the amount of initial capitalrequired. The market also requires perfect demand and priceelasticity. Fluctuations in the market always balance out in the longterm as prices are solely determined by the interaction of demand andsupply and players in the industry will strive to operate optimallywhere marginal revenue equals marginal cost (MR=MC) (Mankiw 2014).
Given the aforementioned conditions of perfectly competitive markets,economists have had to rely on closely perfectly competitive markets.This is because perfectly competitive markets are only idealistic.Governments all over the world regulate nearly all industries throughvarious policies and laws. The foreign exchange (forex) market isthus the best example of the closest thing to a perfectly competitivemarket cited by scholars as a learning case (Graham 2014). In thismarket, all forex firms sell the same homogenous products,information needed to compare prices in the market is easilyaccessible, and there is perfect elasticity of demand and supplybecause there is minimal government interference. Price is purelydetermined by demand in the market between the currencies. Globally,there are five currencies to trade against the US dollar that includethe British pound sterling, Australian dollar, Japanese yen, Swissfranc and European euro. However, in some countries such as China andrecently Brazil, governments have been involved in setting prices byvaluing or devaluing their currencies in order to achieve theireconomic goals. In the US and other western countries, the influenceon the forex market is experienced in the form of interest rates thatare set by the federal reserve bank in the US and central banks inrespective countries.
The most important condition for the presence of perfectlycompetitive markets is the presence of many firms and many buyers.The high number of firms ensures that the firms will compete based onmany levels and most importantly price. Given that demand is highlysensitive to price changes, buyers as rational human beings will seekto go for the least priced product/services in the market given thatthe currencies are homogenous products. However, firms seekadditional means of adding value and competing such as creatingbetter ambience and better customer service to clients. Firms plyingthis industry include commercial banks, commercial companies, centralbanks, investment management firms, hedge funds, and retail forexbrokers and investors (Graham 2014).
Accessibility of information is another key aspect that makes forexalmost perfectly competitive. In the modern age of e-commerce,numerous players in the industry have moved to distribute theirproducts/services via online platforms. This has made informationabout prices and associated services and charges accessible to buyersand competitors in the market. With such information, clients canchoose the best option in the market and allow perfect elasticity ofdemand.
From the above brief discussion, it is clear that perfectlycompetitive markets remain fictitious and idealistic. In laissezfaire markets, perfectly competitive markets would thrive freelybut there are no such markets where government does not seek tocontrol markets. This is especially true in considering the fact thatmoney, which is used in most transactions globally, remains to be alegal tender, is produced, owned and controlled by the government.
References
Foreign Exchange.(2016) Retrieved from <http://www.fxocf.com/foreign-exchange.html>
Graham, A. (2014).Foreign exchange markets. New York: Routledge.
Mankiw, G. (2015). Principles of microeconomics. New York:Cengage Learning.
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