If you are writing about perfect competition, make sure to point out all of the market structures' characteristics and how that causes the market structure to work as it does.
- Perfect competition is one extreme of the competition, where there is a very high level of competition.
- Perfect competition is the only market structure which:
- Normally does not have market failure
- Nuyers and sellers have perfect information of the market
- No government intervention
- No externalities
- Perfect competitions are rare in reality, because they have certain characteristics that are almost impossible to achieve in markets.
- Characteristics of perfect competition
- Large number of small firms
- Homogenous product: no product differentiation
- No barriers to entry and exit
- Characteristics of perfect competition
- As mentioned before there are no existing perfectly competitive markets.
- However the markets that come the closest to it are:
- Agricultural markets (grocery markets)
- Raw material markets e.g crude oil, gold, etc.
Tip
These markets can act as your examples (NOT REAL-LIFE EXAMPLES!) in your answers.
- Perfectly competitive firms have no market power because of the characteristics of this market structure.
- This means they have no ability to set prices; instead, they must accept the market price. If they try to charge more, they will not be able to sell their products.
- Therefore, they are called price-takers.
- As a result, their demand curve is perfectly elastic (flat), fixed at the market price level.
