Economics
Perfect Competition
Perfect competition is a market structure where a large number of firms produce identical products, and there is ease of entry and exit for new firms. In this model, no single firm has the power to influence the market price, and all firms are price takers. Additionally, perfect information is assumed, and there are no barriers to entry or exit.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Perfect Competition"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 8 Perfect Competition In economic theory, Perfect Competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for Perfect Competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect Competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. Basic structural characteristics Generally, a perfectly competitive market exists when every participant is a price taker, and no participant influences the price of the product it buys or sells. Specific characteristics may include: • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. • Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. • Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. • Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). • Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. • Constant returns to scale - Constant returns to scale ensure that there are sufficient firms in the industry.
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
9 The Perfectly Competitive MarketEquilibrium of the Firm and Industry in Short-run and Long-run ; Perfect Competition and Economic Efficiency ; Industry Dynamics: Changes in Demand, Costs and Taxes .The market structure of Perfect Competition is often considered a highly desirable one particularly from the point of view of economic efficiency in a static, distributive sense. This is in consonance with the view that trading in increasingly competitive markets is, in theory, beneficial to economic welfare because of the greater efficiency in the use of economic resources. While this may or may not hold true in reality, it is nevertheless of importance to understand the intricacies and mechanics of this model which has received so much attention.Perfect Competition is the centrepiece of the traditional theory of the firm. It is one of the four basic models of market structure that make up the traditional theory of the firm. The others are Monopoly, Monopolistic Competition and Oligopoly. As a model of market structure, it is used to explain and predict the behaviour of firms which are part of this industry. Furthermore, as one of the so-called ‘marginalist’ models of the firm, the firm is theorized to maximize profits by following the ‘marginalist’ rule of equating marginal revenue with marginal cost.These marginalist models are later contrasted with the more modern alternative models of the firm which are included in the study of market structure. Newer models have proliferated since the 1930 and particularly since the 1950s and include the Managerial, Behavioural, Average-cost/Mark-up Pricing and Entry-Prevention models.9.1 Assumptions and Fundamentals of the Model
9.1.1 Basic assumptions
The basic assumptions of the model of Perfect Competition are as follows:- There are many buyers and sellers (firms) in the industry. There are so many buyers and sellers that no single buyer or seller can influence price or output sufficiently to alter the equilibrium of the industry.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
9 The Perfectly Competitive Market Equilibrium of the Firm and Industry in Short-run and Long-run; Perfect Competition and Economic Efficiency; Industry Dynamics: Changes in Demand, Costs and Taxes. The market structure of Perfect Competition is often considered a highly desirable one particularly from the point of view of economic efficiency in a static, distributive sense. This is in consonance with the view that trading in increasingly competitive markets is, in theory, beneficial to economic welfare because of the greater efficiency in the use of economic resources. While this may or may not hold true in reality, it is nevertheless of importance to understand the intricacies and mechanics of this model which has received so much attention. Perfect Competition is the centrepiece of the traditional theory of the firm. It is one of the four basic models of market structure that make up the traditional theory of the firm. The others are Monopoly, Monopolistic Competition and Oligopoly. As a model of market structure, it is used to explain and predict the behaviour of firms which are part of this industry. Furthermore, as one of the so-called ‘marginalist’ models of the firm, the firm is theorized to maximize profits by following the ‘marginalist’ rule of equating marginal revenue with marginal cost. These marginalist models are later contrasted with the more modern alternative models of the firm which are included in the study of market structure. Newer models have proliferated since the 1930 and particularly since the 1950s and include the Managerial, Behavioural, Average-cost/Mark-up Pricing and Entry-Prevention models. 9.1 ASSUMPTIONS AND FUNDAMENTALS OF THE MODEL 9.1.1 Basic assumptions The basic assumptions of the model of Perfect Competition are as follows: • There are many buyers and sellers (firms) in the industry.
- Thomas J. Webster(Author)
- 2018(Publication Date)
- Routledge(Publisher)
Managers do not explicitly consider the pricing and output decisions of rival firms. This follows from the strict application of conditions for perfectly competitive markets in which the output of any individual firm is very small relative to total industry supply. Each perfectly competitive firm is said to be a price taker. The market price is parametric to the output decision-making process. In other words, perfectly competitive firms are not Bertrand price-setting competitors. On the other hand, our earlier discussion of Cournot output-setting behavior can shed light on our understand-ing of perfectly competitive market structures. The term Perfect Competition is used to describe an industry consisting of a large number of equivalently sized firms, each producing an identical good or service. Because the relative contri-bution of each firm to total industry output is very small, changes in output will not significantly shift the industry supply curve. Thus, perfectly competitive firms do not have the ability to affect the market-determined price. Perfect Competition AND MONOPOLY 207 Perfect Competition A market structure consisting of a large number of utility-maximizing buyers and profit-maximizing sellers of a homogeneous good or service in which factors of production are perfectly mobile, buyers and sellers have perfect information, and entry into and exit from the industry is very easy. Another important characteristic of Perfect Competition is that firms produce a homogeneous product. The purchasing decisions of buyers, therefore, are based entirely on the selling price of the good or service. As a result, individual firms are unable to raise their prices above the market-determined price since they will be unable to attract buyers. Conversely, price cutting is counterproductive since perfectly competitive firms can sell all of their output at the higher, market-clearing price.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
If these conditions exist in a market, an individual buyer or seller has no control over the price. Price is determined by market demand and supply. Once the market establishes the price, any firm is free to supply whatever quantity maximizes its profit. A perfectly competitive firm is so small relative to the market that the firm’s supply decision does not affect the market price. Examples of perfectly competitive markets include those for most agricultural products, such as wheat, corn, cotton, and livestock; markets for basic metals, such as gold, silver, tin, and copper; mar-kets for widely traded stock, such as Google, Apple, Bank of America, and General Electric; markets for foreign exchange, such as yen, euros, pounds, and pesos; and markets for some of the million plus smartphone apps now available. Again, there are so many buyers and sellers that the actions of any one cannot influence the market price. For example, about 68,000 farmers in the United States raise hogs, and tens of millions of U.S. households buy pork products. The model of Perfect Competition allows us to make a number of predictions that hold up pretty well when compared to the real world. Perfect Competition is also an important benchmark for evaluating the efficiency of other types of markets. Let’s look at demand under Perfect Competition. 8-1b Demand Under Perfect Competition Suppose the market in question is the world market for wheat and the firm in question is a typical wheat farm in Kansas. In the world market for wheat, there are hundreds of thousands of farms, so any one supplies only a tiny fraction of market output. For ex-ample, the thousands of wheat farmers in Kansas together produce less than 3 percent of the world’s supply of wheat.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
If these conditions exist in a market, an individual buyer or seller has no control over the price. Price is determined by market demand and supply. Once the market establishes the price, any firm is free to supply whatever quantity maximizes its profit. A perfectly competitive firm is so small relative to the market that the firm’s supply decision does not affect the market price. Examples of perfectly competitive markets include those for most agricultural products, such as wheat, corn, cotton, and livestock; markets for basic metals, such as gold, silver, tin, and copper; mar- kets for widely traded stock, such as Google, Apple, Bank of America, and General Electric; markets for foreign exchange, such as yen, euros, pounds, and pesos; and markets for some of the million plus smartphone apps now available. Again, there are so many buyers and sellers that the actions of any one cannot influence the market price. For example, about 68,000 farmers in the United States raise hogs, and tens of millions of U.S. households buy pork products. The model of Perfect Competition allows us to make a number of predictions that hold up pretty well when compared to the real world. Perfect Competition is also an important benchmark for evaluating the efficiency of other types of markets. Let’s look at demand under Perfect Competition. 8-1b Demand Under Perfect Competition Suppose the market in question is the world market for wheat and the firm in question is a typical wheat farm in Kansas. In the world market for wheat, there are hundreds of thousands of farms, so any one supplies only a tiny fraction of market output. For ex- ample, the thousands of wheat farmers in Kansas together produce less than 3 percent of the world’s supply of wheat.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
wheat] anymore." (Until wheat prices rise, we will probably be seeing field after field of tasseled corn.) 208 Chapter 8 | Perfect Competition This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 break even point entry exit long-run equilibrium marginal revenue market structure Perfect Competition price taker shutdown point KEY TERMS level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits the long-run process of firms entering an industry in response to industry profits the long-run process of firms reducing production and shutting down in response to industry losses where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC the additional revenue gained from selling one more unit the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold each firm faces many competitors that sell identical products a firm in a perfectly competitive market that must take the prevailing market price as given level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately KEY CONCEPTS AND SUMMARY 8.1 Perfect Competition and Why It Matters A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero. Perfect Competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers. 8.2 How Perfectly Competitive Firms Make Output Decisions As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price. Profits will be highest (or losses will be smallest) at the quantity of output where total revenues exceed total costs by the greatest amount (or where total revenues fall short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making zero profits. The point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the “zero profit point.” If the market price faced by a perfectly competitive firm is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately.
eBook - ePubEconomics versus Reality
How to be Effective in the Real World in Spite of Economic Theory
- John Legge, John M Legge(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
Nineteenth-century mechanical engineers designing steam engines knew that real steam would not pass instantaneously from the boiler to the cylinder as soon as the valves were opened; even an ideal gas would have some inertia and consequent “Newtonian” viscosity, which would limit the speed at which it could travel. At the piston speed typical of late-nineteenth-century engines, the discrepancy was minor, although neglecting or miscalculating these effects often led to designs for engines that failed to meet their specifications. Engineers soon learned the risks involved in assuming perfection while dealing with the real world. These lessons were slow to pass to economists.Perfect Competition is a theoretical state in which an economy, or part of an economy, may exist on the assumption that consumers and producers behave like a frictionless, weightless ideal gas: if producer A offers a lower price than producer B, every consumer will instantaneously transfer their business from A to B, no matter how small the price differential. This is known to economists as the Law of One Price, and as such is part of the dogmatic core of the theory of Perfect Competition. Industrial Organization (IO) economists, as discussed further below, do not consider that Perfect Competition exists in reality, although they tread fairly carefully around the Law of One Price.Orwell, in his book 1984, suggested that control of language could become control of thought. The economic concept of Perfect Competition is an example of this: if there is such a thing as perfection, why should anything else be tolerated? Some economists may believe that Perfect Competition is a practical possibility; others realize that the preconditions for Perfect Competition are so stringent as to render it impossible to actually exist as a practical matter of commerce.The best that can be hoped for is “nearly perfect” competition, whatever that may be. J. M. Clark introduced the idea of “workable competition” in 1940.3 “Workable” competition is defined as the closest practical approach to “perfect” competition, recognizing that there aren’t an infinite number of firms or consumers and that all products are not fully interchangeable. Clark’s proposal does not seem to have satisfied the generality of economists. S. H. Sosnick published a critique of workable competition in 1958,4
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Erik Younggren, president of the National Association of Wheat Growers said in the Agweek article, “I don't think we're going to see mile after mile of waving amber fields [of wheat] anymore." (Until wheat prices rise, we will probably be seeing field after field of tasseled corn.) 208 8 • Perfect Competition Access for free at openstax.org Key Terms break even point level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits entry the long-run process of firms entering an industry in response to industry profits exit the long-run process of firms reducing production and shutting down in response to industry losses long-run equilibrium where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC marginal revenue the additional revenue gained from selling one more unit market structure the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold Perfect Competition each firm faces many competitors that sell identical products price taker a firm in a perfectly competitive market that must take the prevailing market price as given shutdown point level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately Key Concepts and Summary 8.1 Perfect Competition and Why It Matters A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
