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Perfect competition

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Kinshook Chaturvedi
Kinshook Chaturvedi

This document discusses the characteristics of perfect competition in economics. It outlines the necessary conditions for a perfectly competitive market, which are: firms are price takers; there are many buyers and sellers; there are no barriers to entry or exit; products are identical; and there is complete information. It explains that under perfect competition, each individual firm faces a perfectly elastic demand curve, meaning it is a price taker, while the market demand curve is downward sloping. The individual firm can have no impact on the market price.

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Perfect Competition Short RunChapter 10-1
A Perfectly Competitive MarketA perfectly competitive market is one in which economic forces operate unimpeded.
A Perfectly Competitive MarketA perfectly competitive market must meet the following requirements:Both buyers and sellers are price takers.
The number of firms is large.
There are no barriers to entry.
The firms’ products are identical.
There is complete information.Perfect Competition Perfect competition is a firm behavior that occurs when many firms produce identical products and entry is easy. Characteristics of perfect competition:There are many sellers.The products sold by the firms in the industry are identical.Entry into and exit from the market are easy, and there are many potential entrants.Buyers (consumers) and sellers (firms) have perfect information.
Price TakerA firm in a perfectly competitive market is said to be a price taker because the price of the product is determined by market supply and demand, and the individual firm can do nothing to change that price.
The Necessary Conditions for Perfect CompetitionBoth buyers and sellers are price takers.Aprice taker is a firm or individual who takes the market price as given.In most markets, households are price takers – they accept the price offered in stores.
The Necessary Conditions for Perfect CompetitionBoth buyers and sellers are price takers.The retailer is not perfectly competitive.A retail store is not a price taker but a price maker.The Necessary Conditions for Perfect CompetitionThe number of firms is large.Large means that what one firm does has no bearing on what other firms do.
Any one firm's output is minuscule when compared with the total market.The Necessary Conditions for Perfect CompetitionThere are no barriers to entry.Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market.
Barriers sometimes take the form of patents granted to produce a certain good.The Necessary Conditions for Perfect CompetitionThere are no barriers to entry.Technology may prevent some firms from entering the market.Social forces such as bankers only lending to certain people may create barriers.The Necessary Conditions for Perfect CompetitionThe firms' products are identical.This requirement means that each firm's output is indistinguishable from any competitor's product.The Necessary Conditions for Perfect CompetitionThere is complete information.Firms and consumers know all there is to know about the market – prices, products, and available technology.
Any technological breakthrough would be instantly known to all in the market.Demand Curves for the Firm and the IndustryThe demand curves facing the firm is different from the industry demand curve.A perfectly competitive firm’s demand schedule is perfectly elastic even though the demand curve for the market is downward sloping.
Perfect Competitors’ Demand CurveThe result is that the individual firm perceives the demand curve for its product as being perfectly horizontal.
Market supplyPricePrice$10$10886644Marketdemand22001020301,0003,000QuantityQuantityMarketFirmIndividual firm demand Market Demand Versus Individual Firm Demand Curve
Market Supply and Demandand Single-Firm Demand

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Perfect competition

  • 1. Perfect Competition Short RunChapter 10-1
  • 2. A Perfectly Competitive MarketA perfectly competitive market is one in which economic forces operate unimpeded.
  • 3. A Perfectly Competitive MarketA perfectly competitive market must meet the following requirements:Both buyers and sellers are price takers.
  • 4. The number of firms is large.
  • 5. There are no barriers to entry.
  • 6. The firms’ products are identical.
  • 7. There is complete information.Perfect Competition Perfect competition is a firm behavior that occurs when many firms produce identical products and entry is easy. Characteristics of perfect competition:There are many sellers.The products sold by the firms in the industry are identical.Entry into and exit from the market are easy, and there are many potential entrants.Buyers (consumers) and sellers (firms) have perfect information.
  • 8. Price TakerA firm in a perfectly competitive market is said to be a price taker because the price of the product is determined by market supply and demand, and the individual firm can do nothing to change that price.
  • 9. The Necessary Conditions for Perfect CompetitionBoth buyers and sellers are price takers.Aprice taker is a firm or individual who takes the market price as given.In most markets, households are price takers – they accept the price offered in stores.
  • 10. The Necessary Conditions for Perfect CompetitionBoth buyers and sellers are price takers.The retailer is not perfectly competitive.A retail store is not a price taker but a price maker.The Necessary Conditions for Perfect CompetitionThe number of firms is large.Large means that what one firm does has no bearing on what other firms do.
  • 11. Any one firm's output is minuscule when compared with the total market.The Necessary Conditions for Perfect CompetitionThere are no barriers to entry.Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market.
  • 12. Barriers sometimes take the form of patents granted to produce a certain good.The Necessary Conditions for Perfect CompetitionThere are no barriers to entry.Technology may prevent some firms from entering the market.Social forces such as bankers only lending to certain people may create barriers.The Necessary Conditions for Perfect CompetitionThe firms' products are identical.This requirement means that each firm's output is indistinguishable from any competitor's product.The Necessary Conditions for Perfect CompetitionThere is complete information.Firms and consumers know all there is to know about the market – prices, products, and available technology.
  • 13. Any technological breakthrough would be instantly known to all in the market.Demand Curves for the Firm and the IndustryThe demand curves facing the firm is different from the industry demand curve.A perfectly competitive firm’s demand schedule is perfectly elastic even though the demand curve for the market is downward sloping.
  • 14. Perfect Competitors’ Demand CurveThe result is that the individual firm perceives the demand curve for its product as being perfectly horizontal.
  • 16. Market Supply and Demandand Single-Firm Demand