perfect competition

Topics: Perfect competition, Economics, Average cost Pages: 3 (965 words) Published: September 26, 2014
1) The assumed characteristics of the perfectly competitive market include product homogeneity. Suppliers of goods and services in the hypothetical perfect market will produce products which cannot be differentiated from each other in any regard. This feature of the model means that sellers in the perfect market will not be able to gain abnormal profits from charging a higher price than their competitors, as buyers have no incentive to choose the product of one firm over another. This means buyers will not purchase products sold at above-equilibrium prices and ensures all sellers in the perfect market retain the same level of revenue and profit. The large number of small firms which make up the perfect market is another key characteristic of this model. A market with many small firms ensures a lack of ‘price making’ by powerful corporations, as no single firm can exert authority or influence enough to change the market’s equilibrium price. Thus this characteristic also prevents any manifestation of the oligopolistic/ monopolistic conditions found in the imperfect market. A third characteristic of the perfect market is found in free entry and exit by firms in and out of the market. Natural barriers such as entry costs and unnatural barriers such as collusion do not exist to prevent new firms from entering the market, and thus there is no exclusivity or restriction when it comes to entry or exit, making it easy for the perfect market to retain a large number of suppliers. Finally, within the perfect market exists perfect economic information. This occurs when buyers and sellers have complete understanding of prices and output. As such firms in the perfect market cannot generate long term abnormal profits, as their competitors have perfect knowledge of their production and pricing methods. Thus if a firm gains a competitive advantage in production and subsequently lowers its prices in order to attract more customers, all the other firms in the market will respond...
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