perfect competition

(noun)

A type of market with many consumers and producers, all of whom are price takers

Related Terms

Examples of perfect competition in the following topics:

  • Definition of Perfect Competition

    • Perfect competition is a market structure that leads to the Pareto-efficient allocation of economic resources.
    • Perfect competition: An industry structure in which there are many firms, none large enough to influence the industry, producing homogeneous products.
    • Agriculture comes close to being perfectly competitive.
    • Perfect competition leads to the Pareto-efficient allocation of economic resources.
    • Both buyers and sellers have perfect information about the price, utility, quality, and production methods of products.

  • The Demand Curve in Perfect Competition

    • A perfectly competitive firm faces a demand curve is a horizontal line equal to the equilibrium price of the entire market.
    • Price is determined by the intersection of market demand and market supply; individual firms do not have any influence on the market price in perfect competition.
    • Individual firms are forced to charge the equilibrium price of the market or consumers will purchase the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of perfect competition).
    • The demand curve for a firm in a perfectly competitive market varies significantly from that of the entire market.The market demand curve slopes downward, while the perfectly competitive firm's demand curve is a horizontal line equal to the equilibrium price of the entire market.
    • In a perfectly competitive market, firms cannot decrease their product price without making a negative profit.

  • Market Differences Between Monopoly and Perfect Competition

    • At one extreme is perfect competition.
    • In a perfectly competitive market, there are many producers and consumers, no barriers to enter and exit the market, perfectly homogeneous goods, perfect information, and well-defined property rights.
    • In reality there are few industries that are truly perfectly competitive, but some come very close.
    • Monopoly and perfect competition mark the two extremes of market structures, but there are some similarities between firms in a perfectly competitive market and monopoly firms.
    • Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient.

  • Conditions of Perfect Competition

    • The concept of perfect competition applies when there are many producers and consumers in the market and no single company can influence the pricing.
    • A perfectly competitive market has the following characteristics:
    • All goods in a perfectly competitive market are considered perfect substitutes, and the demand curve is perfectly elastic for each of the small, individual firms that participate in the market.
    • A firm in a competitive market wants to maximize profits just like any other firm.
    • For all firms in a competitive market, both AR and MR will be equal to the price.

  • Monopolistic Competition Compared to Perfect Competition

    • The key difference between perfectly competitive markets and monopolistically competitive ones is efficiency.
    • Perfect competition and monopolistic competition are two types of economic markets.
    • One of the key similarities that perfectly competitive and monopolistically competitive markets share is elasticity of demand in the long-run.
    • In a perfectly competitive market products are perfect substitutes for each other.
    • In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.

  • Clearing the Market at Equilibrium Price and Quantity

    • When a market achieves perfect equilibrium there is no excess supply or demand, which theoretically results in a market clearing.
    • This definition requires a variety of assumptions which simplify the complexities of real markets to coincide with a more theoretical framework, most centrally the assumptions of perfect competition and Say's Law:
    • Perfect competition is a market where the price determined for a given good or service is not affected by external forces or competition in a way that allows incumbents (companies) to attain market influence.
    • While this concept of market clearing resonates well in theory, the actual execution of markets is very rarely perfect.
    • Even in static markets there is competitive consolidation that allows companies to charge differing price points than that of the equilibrium.

  • Market Structure

    • Generally, they identify 4 basic types of markets; (1) pure (or perfect) competition, (2) monopolistic (or imperfect) competition, (3) oligopolistic competition, and (4) monopoly.
    • Pure competition is believed to produce ideal results in the allocation of resources.
    • Pure competition and Monopoly are at each end of the spectrum of markets.
    • Pure competition and monopoly are the boundaries and the "real world" (wherever that is) lies somewhere between the two extremes.
    • Pure competition provides the benchmark that can be use to evaluate markets.

  • Demand Curve

    • The demand curve in a monopolistic competitive market slopes downward, which has several important implications for firms in this market.
    • The demand curve of a monopolistic competitive market slopes downward.
    • The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic.
    • Monopolistically competitive firms maximize their profit when they produce at a level where its marginal costs equals its marginal revenues.
    • Explain how the shape of the demand curve affects the firms that exist in a market with monopolistic competition

  • Defining Monopolistic Competition

    • Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another.
    • Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location).
    • Unlike in perfect competition, firms that are monopolistically competitive maintain spare capacity.
    • Models of monopolistic competition are often used to model industries.
    • Monopolistic competition is different from a monopoly.

  • Characteristics of Pure Competition

    • The idealized purely competitive market insures that no buyer or seller has any market power or ability to influence the price.
    • The sellers in a purely competitive market are price takers.
    • Sellers cannot charge a price above the market price because sellers see all other goods in the market as perfect substitutes.