Perfect Competition Four Conditions for Perfect Competition s

Perfect Competition

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

Barriers to Entry s Difficult for new firms to enter s Start-up Costs s Technology

Price and Output s Efficient. . At equilibrium

Assumptions Behind a Perfect Competitive Market s Many suppliers each with an insignificant share of the market. s Each firm is too small to affect price via a change in market supply s Identical Products- Perfect substitutes s Complete information on product s All firms equal access to resources s No barriers to entry and exit of firms s No externalities

Examples of Perfectly Competitive s Rare s Close approximations: s - --Homogeneous Product- US dollar or the Euro s Many buyers and sellers s Usually each trader is small relative to total market and has to take the price given. s -- Agricultural Markets s s Pig farming, cattle Farmers markets for apples, tomatoes Wholesale markets for fresh vegetables, fish, flowers Street food market in developing countries

Importance of a Competitive Environment s Competition drives improvement in the welfare and efficiency s Competition forces under-performing firms out of the market and shifts market share to more efficient firms s Competition encourages firms to innovate and adopt best practice techniques.