The limits of the model of perfect competition

"The model cannot be used to 'explain' market prices; the model presumes that everyone has, somehow, correctly and self-fulfilling guessed what the market price is going to be. The circumstance that (quite apart from the assumed correctness of the anticipated price) the model treats each market participant as a price-taker further underscores the uselessness of the model as an explanation for the manner in which prices are adjusted. No one in the model ever does change his price bids or offers." -- Israel Kirzner, Competition, Economic Planning, and the Knowledge Problem, p. 52

As Bob Murphy once  told me once, in the model of perfect competition, it is as though the local grocer wakes up in the morning and is suddenly surprised to find that he is now offering milk at a new price.


  1. The model of perfect competition assumes that all sellers are price takers so if the grocer understands the model he operates in it would seem odd that he didn't recognize the possibility of waking up one morning to find that the price of milk had changed.

    1. rob, you don't care whose it is: if an idea appears on this blog, you'll say it's stupid!
      Bob was pointing out the absurdity of taking the model as reflecting reality: prices do not, in the real world, mysteriously change themselves. His joke was funny, and your comment is a picture of his joke flying right over your head.

    2. For the record - I rarely if ever find ideas expressed on this blog stupid . My comment was not meant to be super serious and and I think your response is a bit unwarranted - but I suppose I should expect that by now !

      Humor is in the ear of the beholder I suppose and you are quite free to think Bob made a joke that went over my head but even upon review I don't think the joke works.
      The perfect competition model does indeed not have a coherent description of a process by which prices might change - but that does not mean that people in the model would be surprised by such changes - they just wouldn't be able to explain them.

      I suppose if people in the model knew they were living in a model with no process for prices changing then they might be surprised when prices actually did change - if that's Bob joke , then yes, it went over my head.

    3. Models don't have people living in them, rob.

      BTW, when I talked with Bob on the phone today we had a good laugh over your reaction.

    4. I'm flattered that you and Bob would even think that a worthy topic of conversations.

      Thanks for clarifying that models don't actually have people in them - better explain that to Israel Kirzner too as he clearly doesn't know this either based on the quote above !

    5. Anyone reading this exchange might conclude that at worse rob is a dimwit who misses the point of Bob's joke and then digs a deeper hole for himself when he tries to explain his misunderstanding. Gene, I recommend that you read it again and ask yourself how you come across in it.

    6. Kirzner nowhere mentions “people.” Models are populated not by people but by “economic agents,” which are mathematical abstractions, not people. And knowing Kirzner fairly well, I guarantee you that he would agree with my statement here.

    7. I hope I come across as someone who doesn’t give a flying f$&@ what some random idiot on the Internet thinks of his comments!

    8. From your quote above :

      Kirzner 'No one in the model ever does change his price bids or offers.'. It is very common for economists to talk this way about models (even when they are actually referring to 'economic agents' ) and its weird you haven't noticed this.

    9. The “his” changing bids is the economic agent in the model. It’s not that I haven’t noticed that models are described like this, it’s that your too dull to understand what’s being said.


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