Perfect Competition Flashcards
Perfect Competition
A market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.
Perfect Competition is an Economic Model (not likely to happen in reality)
Features of Perfect Competition
Many firms (homogeneous products)
No barriers to entry
No advantage for existing firms
Good Price information
Price Takes
A firm must set their prices based on the market.
Assumptions
Many buyers and sellers, who are all price takes. They have no influence over the market price.
There are no barriers to entry or exit.
Buyers and sellers have perfect knowledge of prices.
All firms produce a homogeneous product.
Demand for perfect competition is (elasticity)
Perfectly elastic (for one firm only)
The demand curve is perfectly elastic (horizontal demand curve) if price changes, they lose all customers.
As price is the same, this is also their AR and MR curve.
Will a change in output or supply (for one firm) have an effect on the market price of one product?
No. This is because there are a large number of competitors, one firm will not make a significant change in market price. A change in supply in a perfect competition market structure is known as an independent relationship because the actions of one firm do not affect other firms.
As no firm is large enough to impact on the industry, even if they increase their supply, equilibrium price will remain.
If every firm changed their output/supply, will this have an effect on the market price of one product?
Yes. If every firm increased output, this will cause the demand curve to shift towards the right, because if every firm increases output, they have the power to change the market.
