- Perfect competition
- Perfect competition is a market where many firms sell identical products to many buyers, everyone has all relevant information, and firms can enter and leave freely.
- Price taker
- A price taker is a firm that the pressure of competing firms forces to accept the prevailing equilibrium price in the market.
Conditions of perfect competition
Can you name the four conditions of perfect competition?
A market is perfectly competitive only if all four hold. Farm markets come closest; a market that fails any one is imperfectly competitive.
Many buyers and sellers means so many firms and customers that no single one can move the market price by changing how much it trades.
Can you think of an example?
Thousands of farmers grow wheat. If one doubles her crop or gives up farming altogether, the market price does not noticeably change.
Identical products means every firm sells the same good, so buyers have no reason to pay one firm more than another.
Can you think of an example?
Wholesale buyers cannot tell one Lincolnshire grower's potatoes from another's: the same variety, graded to the same size and packed in the same sacks. Nothing about any one grower's crop is worth paying extra for.
Perfect information means sellers and buyers have all the relevant information to make rational decisions about the product they are buying and selling.
Can you think of an example?
Every grower and every wholesale buyer can look up the going price of potatoes that week, so no buyer pays over the odds by mistake and no grower sells for less without knowing it.
Free entry and exit means firms can enter and leave the market without any restrictions, such as licences or large start-up costs.
Can you think of an example?
If growing potatoes pays better than other crops, farmers switch fields to potatoes the next season; if it pays worse, some switch back.