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.