Perfect Competition

• Perfect competition is a theoretical extreme market structure with a large number of firms producing homogeneous products.
• There are no barriers to entry and exit, and firms and consumers have perfect knowledge.
• Firms in perfect competition are price takers and accept the going market price.
• In the short run, firms can make supernormal profits by producing at the profit-maximizing output.
• In the long run, new entrants will enter the market and compete away supernormal profits, leading to a stable equilibrium with only normal profits.
• Perfectly competitive markets achieve productive and allocative efficiency, but not dynamic efficiency.
• Perfect competition can be used as a benchmark to compare to other market structures.

The market structure of perfect competition assumes a large number of firms producing homogeneous products with no barriers to entry or exit, perfect knowledge, and firms being price takers. In the short run, firms can make supernormal profits by producing at the point where marginal cost equals marginal revenue. However, in the long run, new entrants will enter the market and compete away those profits, leading to a stable equilibrium where only normal profits are made. Perfectly competitive markets achieve productive and allocative efficiency, but dynamic efficiency is unlikely due to the absence of supernormal profits for firms to reinvest in research and development. Although perfect competition is a theoretical extreme, it can be used as a benchmark to compare to other market structures and to analyze the implications of markets moving closer towards perfect competition.