Perfect Competition

satisfied by the typical firm in each industry—from perfect competition at one extreme to monopoly at the other.

PERFECT COMPETITION

The expression “perfect competition”is somewhat misleading because overt competition among firms in perfectly competitive industries is nonexistent.The reason for this is that managers of perfectly competitive firms do not take into consideration the actions of other firms in the industry when setting pricing policy.The reason for this is that changes in the output of each firm are too small relative to the total output of the industry to significantly affect the selling price.Thus,the selling price is parametric to the decision-making process.

The characteristics of a perfectly competitive market may be identified by using the criteria previously enumerated.Perfectly competitive industries are characterized by a large number of more or less equally sized firms. Because the contribution of each firm to the total output of the industry is small,the output decisions of any individual firm are unlikely to result in a noticeable shift in the supply curve.Thus,the output decisions of any individual firm will not significantly affect the market price.Thus,firms in perfectly competitive markets may be described as price takers.The inability to influence the market price through output changes means that the firm lacks market power.

Definition:Market power refers to the ability of a firm to influence the market price of its product by altering its level of output.A firm that produces a significant proportion of total industry output is said to have market power.

Definition:A firm is described as a price maker if it has market power. A price maker faces a downward-sloping demand curve for its product, which implies that the firm is able to alter the market price of its product by changing its output level.

Definition:Perfect competition refers to the market structure in which there are many utility-maximizing buyers and profit-maximizing sellers of a homogeneous good or service in which there is perfect mobility of factors of production and buyers,sellers have perfect information about market conditions,and entry into and exit from the industry is very easy.

Definition:A perfectly competitive firm is called a price taker because of its inability to influence the market price of its product by altering its level of output.This condition implies that a perfectly competitive firm should be able to sell as much of its good or service at the prevailing market price.

A second requirement of a perfectly competitive market is that there also be a large number of buyers.Since no buyer purchases a significant