Perfect Competition in Economics

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.

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.