Perfect Competition in Economics

Study Notes

Overview of Perfect Competition

Perfect competition is a theoretical market structure characterized by no barriers to entry and an unlimited number of producers and consumers.
In this market, a perfect elastic demand curve exists, meaning demand reacts infinitely to price changes.

Key Features of Perfect Competition

Infinitely Large Number of Buyers and Sellers
- No individual buyer or seller can influence market price due to their insignificant market share.
- Prices are set by market demand and supply, making firms price takers rather than price makers.
Homogenous Product
- Firms sell identical commodities, ensuring perfect substitutability across products.
- No differences exist in packaging, quality, or color among products sold by different firms.
Free Entry and Exit
- New firms can enter the market easily without significant barriers such as financial constraints, technical issues, or government regulations.
- Long-term profit equilibrium leads all firms to earn only normal profits, while short-term fluctuations can result in supernormal profits or losses.
Perfect Knowledge of Market
- Buyers and sellers possess complete awareness of product characteristics and competitor pricing.
- This knowledge contributes to the establishment of uniform prices across the market.

Market Dynamics

Average Revenue (AR) and Marginal Revenue (MR)
- Average Revenue remains constant and equal to price for all output units sold due to the price-taking nature of firms.
- Marginal Revenue is also constant and equivalent to Average Revenue in a perfectly competitive market.

Description

This quiz covers the concept of Perfect Competition, a theoretical market structure with unlimited contestability and a large number of producers and consumers. It features a perfect elastic demand curve and homogeneous commodities sold at a uniform price.