This model provides a context in which to apply revenue and cost concepts developed in the previous lecture. Examples of this model are stock market and agricultural industries. Homogenous or standardized products:
Perfect information — All consumers and producers know all prices of products and utilities each person would get from owning each product. Homogeneous products — The products are perfect substitutes for each other, i. Well defined property rights — These determine what may be sold, as well as what rights are conferred on the buyer.
Every participant is a price taker — No participant with market power to set prices Perfect factor mobility — In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
Profit maximization of sellers — Firms sell where the most profit is generated, where marginal costs meet marginal revenue. Buyers make all trades that increase their economic utility and make no trades that do not increase their utility.
No externalities — Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention. Zero transaction costs — Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market. Non-increasing returns to scale Perfect competition is rare in the no network effects — The lack of economies of scale or network effects ensures that there will always be a sufficient number of firms in the industry.
Anti-competitive regulation - It is assumed that a market of perfect competition shall provide the regulations and protections implicit in the control of and elimination of anti-competitive activity in the market place. Normal profit[ edit ] In a perfect market the sellers operate at zero economic surplus: Normal profit is a component of implicit costs and not a component of business profit at all.
It represents the opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. The enterprise component of normal profit is thus the profit that a business owner considers necessary to make running the business worth her or his while i.
Only normal profits arise in circumstances of perfect competition when long run economic equilibrium is reached; there is no incentive for firms to either enter or leave the industry.
Economic profit does not occur in perfect competition in long run equilibrium; if it did, there would be an incentive for new firms to enter the industry, aided by a lack of barriers to entry until there was no longer any economic profit. New firms will continue to enter the industry until the price of the product is lowered to the point that it is the same as the average cost of producing the product, and all of the economic profit disappears.
Normally, a firm that introduces a differentiated product can initially secure a temporary market power for a short while See "Persistence" in Monopoly Profit. At this stage, the initial price the consumer must pay for the product is high, and the demand for, as well as the availability of the product in the marketwill be limited.
In the long run, however, when the profitability of the product is well established, and because there are few barriers to entry   the number of firms that produce this product will increase until the available supply of the product eventually becomes relatively large, the price of the product shrinks down to the level of the average cost of producing the product.
When this finally occurs, all monopoly profit associated with producing and selling the product disappears, and the initial monopoly turns into a competitive industry. Profit can, however, occur in competitive and contestable markets in the short run, as firms jostle for market position.Reality of perfect competition In the real world, perfect competition is very rare and the model is more theoretical than practical.
However in general economists often talk about competitive markets which do not require the strict criteria of perfect competition. perfect competition Pure or perfect competition is rare in the real world, but the model is important because it helps analyze industries with characteristics similar to pure competition.
This model provides a context in which to apply revenue and cost concepts developed in the previous lecture. Because these five requirements rarely exist together in any one industry, perfect competition is rarely (if ever) observed in the real world.
For example, most products have some degree of.
Start studying Economics: Chapter 7 Study Guide. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Why is perfect competition among businesses rare?
The main difference between monopolistic competition and perfect competition is what? Economists' Thoughts on Perfect Competition.
No economist believes perfect competition is representative of the real world. Very few believe perfect competition is ever achievable.
The real debate among economists is whether perfect competition should be considered a theoretical benchmark for real markets. Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.