Economics
Perfect competition
A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers, and society. Ex:- Wheat, rice
Key characteristics
Perfectly competitive markets exhibit the following characteristics: 1. There is perfect knowledge, with no information failure or time lags. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. 2. There are no barriers to entry into or exit out of the market. 3. Firms produce homogeneous, identical, units of output that are not branded. 4. Each unit of input, such as units of labour, are also homogeneous. 5. No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. 6. There are a very large numbers of firms in the market. 7. There is no need for government regulation, except to make markets more competitive. 8. There are assumed to be no externalities, that is no external costs or benefits. 9. Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
The firm as price taker
The single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it.
Equilibrium in perfect competition
In the short run
Under perfect competition, firms can make super-normal profits or losses.
In the long run
However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of
A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. Neo-classical economists argued that perfect competition would produce the best possible outcomes for consumers, and society. Ex:- Wheat, rice
Key characteristics
Perfectly competitive markets exhibit the following characteristics: 1. There is perfect knowledge, with no information failure or time lags. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. 2. There are no barriers to entry into or exit out of the market. 3. Firms produce homogeneous, identical, units of output that are not branded. 4. Each unit of input, such as units of labour, are also homogeneous. 5. No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. 6. There are a very large numbers of firms in the market. 7. There is no need for government regulation, except to make markets more competitive. 8. There are assumed to be no externalities, that is no external costs or benefits. 9. Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
The firm as price taker
The single firm takes its price from the industry, and is, consequently, referred to as a price taker. The industry is composed of all firms in the industry and the market price is where market demand is equal to market supply. Each single firm must charge this price and cannot diverge from it.
Equilibrium in perfect competition
In the short run
Under perfect competition, firms can make super-normal profits or losses.
In the long run
However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of