This paper makes an assessment of the impact of the market imperfections on the functioning of the international capital markets.
The perfect market is an economic model which describes a hypothetical market condition in which no producer or consumer has an absolute control to influence the prices. As laid down by the concept of Pareto efficiency a perfect market model would eventually lead to a totally efficient outcome. The theories of demand and supply have been evolved using the analysis of perfectly competitive markets. Efficient allocation and use of resources and maximization of social welfare characterize the perfect market equilibrium (Writing Campus). The perfect market model assumes the presence of certain conditions which make the prices move towards economic equilibrium instantaneously. However these conditions are to be treated as sufficient but not necessary conditions.
In a perfect market there exist a large number of small producers and consumers. Because of their relative sizes the actions of these players do not have any significant impact on the others. The prices are set by the market and the firms represent only price takers (Writing Campus).
In the perfect market model the goods and services represent perfect substitutes to each other. All the firms in the market sell identical products and there is no product differentiation among the individual products (Writing Campus).
Perfect and Complete Information
All the players in the market have perfect and complete information about the prices and the activities of other players in the market. The prices set by different firms in the market are known to all the players (Writing Campus).
One of the major assumptions in the perfect market model is that all the firms in the market have equal access to production technologies and resources, since the technologies and resources are considered to be perfectly mobile (Writing Campus).
There are no restrictions on the entry to or exit from the market for any firm. The firms may enter and leave the market as they wish and such exit will not have any additional burden on the firms. There is the existence of complete independence in the market that the individual buyers and sellers act independently of each other. The market is structured in such a way that there is no scope for a group of buyers and sellers to join together to influence the prices for their common interest. In other words there is no possibility of cartels or collusion in a perfect market model (Writing Campus).
Apart from the above conditions there are certain other behavioural assumptions which also form the basis of a perfect market model. They are:
It is the objective of the consumers to achieve maximum utility and the objective of the producers is to maximize their profits.
The perfect market model is subjected to severe criticisms on the ground that the model is too simplified and the simplifications are irrelevant and inappropriate to describe the kind of society, market etc. This model can be regarded as a description of one type of market structure with most of its assumptions getting violated in the real world. For instance the firms may not have perfect information about each other. The usefulness of perfect market mo