Introduction:
- Perfect Competition Market Structure is not perfect however is perfect for competition
- Give Market Structure of Perfect Competition:
1. Many buyers who are all informed of prices
2. Many small sellers
3. Low barriers to entry
4. Undifferentiated Products (homogeneous products hence can substitute perfectly)
- What are the conditions for equilibrium in perfect competition: when sellers produce as
much as buyers want to purchase and when buyers purchase as much as sellers choose to
produce.
Main Body:
- Assumptions of Perfect Competition:
1. Buyers are price takers: each buyer takes the price given and believes they can buy as
much as they want that price without influencing it. This implies there are many buyers.
2. Buyers and Sellers have complete information: sellers can respond to incentives of theirs
and of buyers. Buyers have the greatest chance to receive what they want from the
market.
3. Sellers are price takers: each seller believes its output will not affect market price; hence
each seller believes it can sell as much as it wants at this price without influencing the
market price as well as believing its output choice will not trigger a reaction from rivals
4. Entry is Free: A potential seller can enter the market in the long run without incurring
costs that an incumbent seller would not incur. As entry is a LR decision where all factors
of production must be variable this assumption implies
Sellers are in the market if they have capital, and they can increase their output
by employing more labour
A potential seller cannot produce with just labour; they must have capital first
- What do the conditions for equilibrium in perfect competition mean:
1. The market price is determined by market supply & demand
2. A seller’s output is determined by seller-specific supply & demand
- The short run equilibrium supply curve of a firm (MC curve) is derived from the marginal
output rule (MR=MC is profit max output where firms produce) and SR shutdown rule (p>
AVC)
- Diagram for the SR equilibrium of perfect competition:
- Perfect Competition Market Structure is not perfect however is perfect for competition
- Give Market Structure of Perfect Competition:
1. Many buyers who are all informed of prices
2. Many small sellers
3. Low barriers to entry
4. Undifferentiated Products (homogeneous products hence can substitute perfectly)
- What are the conditions for equilibrium in perfect competition: when sellers produce as
much as buyers want to purchase and when buyers purchase as much as sellers choose to
produce.
Main Body:
- Assumptions of Perfect Competition:
1. Buyers are price takers: each buyer takes the price given and believes they can buy as
much as they want that price without influencing it. This implies there are many buyers.
2. Buyers and Sellers have complete information: sellers can respond to incentives of theirs
and of buyers. Buyers have the greatest chance to receive what they want from the
market.
3. Sellers are price takers: each seller believes its output will not affect market price; hence
each seller believes it can sell as much as it wants at this price without influencing the
market price as well as believing its output choice will not trigger a reaction from rivals
4. Entry is Free: A potential seller can enter the market in the long run without incurring
costs that an incumbent seller would not incur. As entry is a LR decision where all factors
of production must be variable this assumption implies
Sellers are in the market if they have capital, and they can increase their output
by employing more labour
A potential seller cannot produce with just labour; they must have capital first
- What do the conditions for equilibrium in perfect competition mean:
1. The market price is determined by market supply & demand
2. A seller’s output is determined by seller-specific supply & demand
- The short run equilibrium supply curve of a firm (MC curve) is derived from the marginal
output rule (MR=MC is profit max output where firms produce) and SR shutdown rule (p>
AVC)
- Diagram for the SR equilibrium of perfect competition:
