Perfect Competition Chapter 7 Section 1

Perfect Competition Definition: (also know as pure competition) A market in which a large number of firms are in competition. All firms produce the same product. The market is in equilibrium. Intense competition keeps prices at their lowest sustainable level.

Four Conditions for Perfect Competition 1. Many buyers and sellers participate in the market. 2. Sellers offer identical products. 3. Buyers and sellers are well informed about products. 4. Sellers are able to enter and exit the market freely.

Buyers & Sellers Perfect market requires many buyers AND sellers. No single firms is large enough to dominate or influence the market.

Identical Products In perfectly competitive market, there is no difference between products from different sellers. A product that is considered the same regardless of who makes or sells it is called a Commodity. Why are identical products key to perfect competition?

Informed Buyers and Sellers Buyers and sellers know enough about the market to find the best deal. The market provides full information on products and prices. REALITY: Time spent gathering information must be worth the amount of money saved.

Free Market Entry and Exit Companies can freely enter a market to make money and leave when they lose money.

Barriers to Entry Definition: Factors that make it difficult for new firms to enter a market. Ex. Start up costs, technology, etc

Start Up Costs Expenses that a new business must pay before the first product reaches the customer. Markets with high start up costs= entrepreneurs less likely to enter market= markets not perfectly competitive.

Technology Some markets require a large amount of technological knowledge and training. New entrepreneurs cannot easily enter these markets, therefore competition is imperfect.

Price and Output “ In a perfectly competitive market, prices correctly represent the opportunity costs of each product.” Opportunity Cost: The most desirable alternative given up as the result of a decision.