Perfect Competition in Economic Theory

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Perfect competition

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It has been suggested that Perfect market be merged into this article or section. (Discuss) Proposed since April 2012.


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In economic theory, perfect competition (sometimes called pure 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.

[hide] 1 Basic structural characteristics
2 Approaches and conditions
3 Results 3.1 Profit

4 The shutdown point
5 Short-run supply curve
6 Examples
7 Criticisms
8 Equilibrium in perfect competition
9 See also
10 References

[edit] 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 – 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 number of firms in the industry. Property rights - Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer.

In the short run, perfectly-competitive markets are not productively efficient as output will not occur where marginal cost is equal to average cost (MC=AC). They are allocatively efficient, as output will always occur where marginal cost is equal to marginal revenue (MC=MR). In...
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