In perfect competition, there are a large number of small firms producing homogenous products, in other words, products produced by one firm is identical to the products produced by other firms in the market. There are also a large number of buyers within the market where they have perfect information about the products. Therefore, no individual trader is able to influence the market price. The market price is thus determined by the operation of the market. Firms in the perfect competition are able to enter the market if they think it’s a profitable step, and they can exit from the market without any obstacle.
In short-run, the firm in the perfect competition act as a “price taker”, and has to accept whatever price is set in the market. The firm faces a perfectly elastic demand curve for its product, as shown in Figure 1. In this figure P1 is the price set in the market, and the firm cannot sell at any other price. If the firm tried to set above P1 it will sell nothing, as buyers know that there is no quality difference between the product as produced by other firms in the markets. Also, there is no incentive for any firm to set a price below P1.
As the firm choose to produce at the profit maximum point, the firm needs to set output at a level where marginal revenue is equal to marginal cost. Figure 2 illustrates this by adding the short-run cost curves to the demand curves. The firm faces constant average revenue and marginal revenue, as the demand curve is horizontal and will choose output at q1,... [continues]
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(2010, 11). Why Is Perfect Competition Often Described as the Ideal Market Structure? Compare and Contrast with Other Known Market Structures.. StudyMode.com. Retrieved 11, 2010, from http://www.studymode.com/essays/Why-Is-Perfect-Competition-Often-Described-498535.html
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"Why Is Perfect Competition Often Described as the Ideal Market Structure? Compare and Contrast with Other Known Market Structures.." StudyMode.com. 11, 2010. Accessed 11, 2010. http://www.studymode.com/essays/Why-Is-Perfect-Competition-Often-Described-498535.html.