Because there are many, many consumers in perfect competition, this firm could have charged the market price and still sold any number of units (this is what the horizontal demand curve tells us). It can still sell any number of units, but now it is selling them at a lower price and making less profit. All products are perfect substitutes, so demand is perfectly elastic.Ĭonsider what would happen if this firm instead lowered its price. This is why the demand facing an individual firm is horizontal. There are many, many firms producing an identical product, so consumers will not buy any units at the higher price, resulting in zero revenue. Market Power is a seller's ability to set their own price or influence the market price, thereby maximizing profit.Ĭonsider what would happen if a firm in perfect competition raised its price above the market price. Everything other than perfect competition is called imperfect competition, which in contrast, includes the cases of monopolistic competition, oligopoly, monopoly, and everything in-between as shown in Figure 1 above. Most real-life examples of competitive markets exhibit some, but not all, of these defining features. No barriers to entry or exit - there are no setup costs for sellers entering the market and no disposal costs upon exit.No market power - firms and consumers are "price takers," so they have no measurable impact on the market price.Identical products - in other words, each firm's products are undifferentiated.A large number of buyers and sellers - there are seemingly infinitely many on both sides of the market.Perfect competition is defined by several characteristics: Perfect competition is at the other end of the spectrum, where there are so many firms and consumers that we might think of the number as being almost infinite. We can think of a market with only one seller (a monopoly) as being at one end of a spectrum of market structures, as illustrated in Figure 1. It turns out that the efficiency of a market can have a lot to do with the number of firms and consumers in that market. Perfect competition is a market structure in which there is a large number of firms and consumers. Interested? Then read on! Perfect Competition Definition Here, you will learn everything there is to know about perfect competition. Although it may not exist in the real world, perfect competition serves as an important benchmark for assessing whether resources are allocated efficiently in real market structures in the economy. How would you feel living in a world where all products are homogeneous? This would also be the world where neither you as a consumer nor the firm as a seller, has the ability to influence the market price! This is what a perfectly competitive market structure is all about. Price Determination in a Competitive Market.Market Equilibrium Consumer and Producer Surplus.Determinants of Price Elasticity of Demand.Cross Price Elasticity of Demand Formula.Effects of Taxes and Subsidies on Market Structures.Monopolistic Competition in the Short Run.Monopolistic Competition in the Long Run.Behavioural Economics and Public Policy.
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