Perfect Competition

Only available on StudyMode
  • Download(s) : 263
  • Published : November 23, 2012
Open Document
Text Preview
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. 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 – An infinite number of 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 – A lack of entry and exit barriers makes it extremely easy to enter or exit 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 - All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products. * Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market. * Profit maximization - Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated. * Homogenous products - The qualities and characteristics of a market good or service do not vary between different suppliers. * Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient...
tracking img