Perfect competition is a market structure with , , , and free entry/exit. Firms are price-takers, unable to influence market prices individually. This leads to efficient resource allocation and maximum social welfare.
In perfectly competitive markets, firms produce where marginal cost equals market price. The large number of participants prevents monopolies, while homogeneous products eliminate non-price competition. Free entry/exit ensures long-run economic profits tend towards zero, promoting .
Characteristics of Perfect Competition
Key Features of Perfect Competition
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Perfect competition characterized by four main features large number of buyers and sellers, homogeneous products, perfect information, and
Individual firms act as price takers with no influence over market price
for perfectly competitive firm perfectly elastic (horizontal line at market price)
Zero transaction costs and no barriers to entry or exit for firms
results in economic profits driven to zero
Perfect information assumption ensures all market participants have complete knowledge of prices, product quality, and market conditions
Market reaches equilibrium quickly due to perfect information and numerous participants
Price-Taking Behavior and Market Dynamics
Firms cannot influence market price individually due to their small size relative to the market
Price-taking behavior leads to firms producing at the point where marginal cost equals market price
Market price determined by aggregate supply and demand, not by individual firm decisions
Firms adjust output levels in response to market price changes rather than setting their own prices
Price-taking behavior results in allocative efficiency as firms produce where price equals marginal cost