Perfect competition

We will explore the market structure known as perfect competition, which serves as the benchmark against which other market structures are compared. Perfect competition describes a market where there are very many small buyers and sellers, none of whom can influence the market price. Instead, the price of the good is determined entirely by the overall forces of supply and demand across the industry. Because of this, each firm becomes what is called a price taker, simply accepting the prevailing market price. Although this model may not occur perfectly in reality, it provides a clear framework for understanding how market forces allocate resources when no single actor has power over prices. There are some critical assumptions that define perfect competition. First, all firms sell a homogeneous product. There is no differentiation. Goods are identical from one seller to another. Second, there is perfect information. Consumers know all about prices and quality available, and firms fully understand their own and competitors costs and revenues. Third, there is costless or completely free entry and exit. New firms can enter if profits are attractive and they can leave without barriers if losses occur. Finally, the market contains so many buyers and sellers that individual decisions cannot shift the market price, making all participants price takers. Short run and long run dynamics in perfect competition reveal important distinctions. In the short run, firms may find themselves making super normal profits.