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By the end of this section, you will be able to:
  • Explain the characteristics of a perfectly competitive market
  • Discuss how perfectly competitive firms react in the short run and in the long run

Firms are said to be in perfect competition    when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.

A perfectly competitive firm is known as a price taker    , because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors. When a wheat grower, as discussed in the Bring it Home feature, wants to know what the going price of wheat is, he or she has to go to the computer or listen to the radio to check. The market price is determined solely by supply and demand in the entire market and not the individual farmer. Also, a perfectly competitive firm must be a very small player in the overall market, so that it can increase or decrease output without noticeably affecting the overall quantity supplied and price in the market.

A perfectly competitive market is a hypothetical extreme; however, producers in a number of industries do face many competitor firms selling highly similar goods, in which case they must often act as price takers. Agricultural markets are often used as an example. The same crops grown by different farmers are largely interchangeable. According to the United States Department of Agriculture monthly reports, in 2015, U.S. corn farmers received an average price of $6.00 per bushel and wheat farmers received an average price of $6.00 per bushel. A corn farmer who attempted to sell at $7.00 per bushel, or a wheat grower who attempted to sell for $8.00 per bushel, would not have found any buyers. A perfectly competitive firm will not sell below the equilibrium price either. Why should they when they can sell all they want at the higher price? Other examples of agricultural markets that operate in close to perfectly competitive markets are small roadside produce markets and small organic farmers.

Visit this website that reveals the current value of various commodities.

This chapter examines how profit-seeking firms decide how much to produce in perfectly competitive markets. Such firms will analyze their costs as discussed in the chapter on Cost and Industry Structure . In the short run, the perfectly competitive firm will seek the quantity of output where profits are highest or, if profits are not possible, where losses are lowest. In this example, the “short run” refers to a situation in which firms are producing with one fixed input and incur fixed costs of production. (In the real world, firms can have many fixed inputs.)

In the long run, perfectly competitive firms will react to profits by increasing production. They will respond to losses by reducing production or exiting the market. Ultimately, a long-run equilibrium will be attained when no new firms want to enter the market and existing firms do not want to leave the market, as economic profits have been driven down to zero.

Key concepts and summary

A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero.

Perfect competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers.

Questions & Answers

What are the reasons for the existence of monopoly?
Gerry Reply
Because such barriers occur in different forms, there are therefore varying reasons for the existence of monopolies. Ownership of a Key Resource: When one company exerts sole control over a resource that is necessary for the production of a specific product, the market may become a monopoly.
Kenneth
Thanks Kenneth
Gerry
what is international trade
Syed Reply
what is imperfect compition
Syed
what is crowding out effect
LAXMI Reply
what is federal finance?
LAXMI Reply
what is populic
Kute
what is imperfect compition
Syed
Explain five importance of the study of economic
Francis Reply
study of economics help a person to make rational choice in multiple wants. help individual to be a well all-round thinker.
Bitrus
the five important of the study of economics are as follows (1)time (2)management of resources (3)choice making (4)business(5)scarcity
Terkimbi
an increase in demand (while supply remains constant) what will happen to deh graph?
Thabiso Reply
what is going to happen to the graph if there is an increase in demand, While supply remains constant .
Thabiso
What will happen to the graph if there is an increase in demand While supply remains constant?
Thabiso
price will increase high than automatically demand will decrease
takshaveer
equilibrium ?
Issum
is when the supply and demand are balanced
ISAH
what is demand
Sarkwah Reply
demand is the willingness to buy a commodity backed by the ability to pay.
Runwell
demand is mere desire on commodity with ability to back up with purchasing power
Terkimbi
Equilibrium is when there's an equality between quantity demanded and quantity supplied
Victory Reply
Again the consumer will be in equilibrium if the price of the commodity is equal to Marginal utility of that product
daniel
wat is the law of supply
Agnes Reply
It's what* -The law of supply states that price and supply is relative. As all factors are equal, if price increases then quantity of supply there for increases.
Nathaniel
the law of suppy state that when prise is high, more commodity with be supply and when p is low less of the same commodity will be supply.
BEGE
It states that, "other things being equal, move supplied at a higher price than at a lower price ".
Murewah
okay
Agnes
it's state that the increased in prices will lead to decreased in supply
Asuquo
what is the theory of supply and the determinants of demand
Murewah
And please what is change in quantity supplied?
Agnes
guys why are you so quiet
Murewah
A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity Cost of keeping the old TV?
Murewah Reply
principle of effective demand?
Abubakar Reply
the is the situation in which the need of individuals exceed the available resource. increase in population rate and wrong decision making
esther Reply
what is the different between wants and demand?
Terkimbi
wants are what people desire to have but they can live without them and demand is a thing that is most wanted
Murewah
what are the demand pull inflation
Hijja
the higher the aggregate level of activity, the larger the proportion of areas and industries which experience excess demand for goods and labour of various sorts , and the more powerful is demand-inflationary pressure . Demand inflation is contrasted with cost inflation , in which price and wage
Murewah
increases are transmitted from one sector to another. These should be regarded as different aspects of an overal inflation starts , cost inflation explains why inflation once begun is so difficult to stop.
Murewah
what is the important difference between positive and normative economics
Umar
positive economics is the study of how an economy works in practice, as opposed to the theoretical study of how it should run in theory and normative economics is the party of economics that is concerned with how the economy ought to be run.
Murewah
positive economic deal with fact and also talks about how the economy actually is like while normative economic deal with value judgement and talks about how the economy ought to be like
esther
What is the difference between opportunity cost and choice
Murewah
opportunity cost are also known as forgun alternative why choice is to select one among alternative
Terkimbi
importance of economic
Zakaria Reply
satisfaction of human wants
Festo
economics is about to economise . discuss
Angel Reply
Underlines the efficiency aspect. Economise towards what: Economise factors to reach equal distribution of Material wealth or Just to operate optimally to Service demand, i. e. Run markets efficiently?
Homo
join the conversation
abba Reply
Hi I'm Ashnly Parker.
Murewah

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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