Perfect competition is an industry where there are many buyers and sellers, firms sell products that are homogeneous (identical), firms have no power over the market, firms that are in perfect competition are price takers. Furthermore, there are bariers of entry to the industry which means established firms have no advantages over newer firms. Lastly, sellers and buyers are clarified about the prices of goods.
Price taker:
Price taker is a firm that can't influence the price of goods and services. This means that the firms must accept ther equilibrium market price. Each firm's product is a perfect substitute for the output of the other firms which means that demans for each firm's product is perfectly elastic.
Economic Profit and Revenue
A firm’s marginal revenue is the change in total revenue that results from a one-unit increase in the quantity sold.
The Firm’s Decisions in Perfect Competition – Short-Run
The perfectly competitive firm makes two decisions in the short run. They are, whether to produce or to shut down, if the decision is to produce, what quantity to produce.
The Firm’s Decisions in Perfect Competition – Long Run
A firm’s long-run decisions are, whether to increase or decrease its plant size, or to stay in the industry or leave it.
Advantages of Perfect Competition
High degree of competition helps allocate resources to most efficient use. Price is equal to Marginal Cost .Normal profit made in the long run. Firms operate at maximum efficiency. Consumers and producer surplus will be maximised
Disadvantages of Perfect Competition
Insufficient profits for investment. Lack of product variety. Lack of competition over product design and specification.
Competition and Efficiency
The quantity Q* and price P* are the competitive equilibrium values. So competitive equilibrium is efficient.
The consumer gains the maximum consumer surplus and the producer gains the maximum producer surplus.
Link: http://ssaatthh.blogspot.com/2012/11/perfect-competition-aaron.html
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