🏪 Perfect Competition: The Benchmark Model
What is perfect competition?: Perfect competition.
Four key assumptions
- Many small firms — each firm is so small relative to the market that it cannot influence the price.
- Homogeneous products — goods are identical across all firms. Consumers have no reason to prefer one firm over another.
- Perfect information — buyers and sellers know all prices, quality, and technology. No one can gain an advantage through information.
- Free entry and exit — no barriers to entry or exit. Firms can enter when attracted by profits and leave when making losses.
No real-world market is perfectly competitive, but agricultural markets (wheat, rice) and foreign exchange come close. The model is a benchmark for comparing other market structures.
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⚖️ Long-Run Equilibrium
The adjustment process: Free entry and exit drives the PC market to long-run equilibrium where firms earn normal profit only (AR = ATC). Supernormal profits attract entry → supply ↑ → price ↓. Losses cause exit → supply ↓ → price ↑.
Long-run equilibrium conditions
- P = MC → allocative efficiency.
- P = minimum ATC → productive efficiency.
- P = AR = MR = MC = ATC — all five are equal at the long-run equilibrium point.
Perfect competition achieves BOTH allocative AND productive efficiency in the long run. This is why it's the benchmark — no other market structure achieves both simultaneously.