Lesson Objectives:
By the end of this lesson you will be able to:
*Describe the 4 conditions that are in place in a perfectly competitive market.
*List two common barriers that prevent firms from entering a market.
*Describe prices and output in a perfectly completive market.

Have you ever been to a farmers market?
If not, a farmers market has many different farmers selling similar fruits and vegetables. Each farmer charges the same price for fruits and vegetables.
Why isn’t this the case for other goods? (i.e. a car, a TV, a computer)
A farmers market with its identical goods/prices is a real-world example of a market in “perfect competition”. In this section you will learn about factors that prevent perfect competition in most markets.

Four Conditions for Perfect Competition
Perfect competition, also called pure competition, is a market in which a large number of firms all produce the same product and no single seller controls supply or prices. The market is in equilibrium and all firms sell the same product for the same price.
Since each firm produces so little of the product compared with the total supply, no single firm can hope to influence prices. The only decision such producers can make is how much to produce, given their production costs and the market price.
Very few industries meet all of the conditions for perfect competition but a few do come pretty close.
Examples of industries that come “close” to perfect competition:
*Markets for farm products
*Stocks traded on the New York Stock Exchange

4 Conditions that must be met in order to have a perfectly competitive market
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
Key vocabulary:
Commodity: A product that is considered the same regardless of who makes or sells it. (i.e. sugar, notebook paper). Commodities are key for perfect competition because the buyer will not pay extra for one brand over the other.
Barrier to entry: Any factor that makes it difficult for a new firm to enter a market.

Barriers to Entry
Factors that make it difficult for new firms to enter a market are called barriers to entry. Barriers to entry can lead to imperfect competition.
Examples of barriers to entry:
1. Start-up costs
2. Technology
Entrepreneurs need to invest money in a new firm long before they can start earning income. Expenses that a new business must pay before it can begin to produce and sell goods are called startup costs.
When start up costs are high, entrepreneurs are less likely to enter that market. As a result, markets that involve high start-up costs are less likely to be perfectly competitive markets.

Internet based companiesUse of the internet reduce start-up costs in many markets however, many entrepreneurs discovered tat a Web page did not attract & hold customers as easily as a shop window. The high costs of advertising, shipping, and discounting goods pushed many out of business. With a few exceptions, the Internet-based companies that have succeeded paid substantial start-up costs.
Some markets require a high degree of technological know-how
(knowledge/skills to create or repair something).
Examples: carpenter, pharmacist, electrician, computer software engineers.
As a result, new entrepreneurs cannot easily enter these markets without a lot of preparation and study. These technological barriers to entry can keep a market from becoming perfectly competitive.

Price and Output
One of the primary characteristics of perfectly competitive markets is that they are efficient. Competition within these markets keeps both prices and production costs low. Firms must use all inputs
(land/labor/capital/) to their best advantage. In a perfectly competitive market, prices correctly represent the opportunity costs of each product.
Prices in a perfectly competitive market are the lowest sustainable prices possible. The large number of sellers creates competition that forces prices down to the point where the prices just cover the most –efficient sellers’ costs of doing business.
In the long run, output in a perfectly competitive market will reach the point where each supplying firm just covers, all of its costs, including paying the firm’s owners enough to make the business worthwhile.