3.7 — Perfect Competition

There are four types of market structures, on a left-to-right axis:

1. Pure Competition
2. Monopolistic Competition
3. Oligopoly
4. Pure Monopoly

Every product sold in a market can be considered one of the above. For example: the OS market system is mildly monopolistic, while the fast food market has monopolistic competition.

Pure Competition

A perfectly competitive market is characterized by many firms producing identical products, free entry and exit, and firms acting as price takers.

1. Many Sellers and Buyers:
   • No single firm or buyer can influence the market price.
   • Each firm produces a small portion of the total market output.
2. Homogeneous Products:
   • Goods are identical, so buyers have no preference between products from different sellers.
3. Free Entry and Exit:
   • Firms can easily enter or exit the market in response to profit or loss.
   • This ensures long-run economic profit equals zero.
4. Perfect Information:
   • All participants know the market price, costs, and quality of goods.
5. Price Takers:
   • Individual firms accept the market price determined by supply and demand.

Efficiency in Perfect Competition

1. Productive Efficiency:
   • Firms produce at the lowest possible cost.
   • Achieved when $P=\text{minimum }ATC$.
2. Allocative Efficiency:
   • Resources are allocated to their most valued uses.
   • Achieved when $P=MC$, meaning the price reflects the marginal cost of production.