Perfect Competition

Topics: Perfect competition, Monopoly, Economics Pages: 4 (1449 words) Published: November 23, 2012
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...
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