Perfect competition

In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. This leads to an outcome which is efficient, according to the economic definition of Pareto efficiency. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand. One example of perfect competition in the real world is the agricultural industry, whose large amount of suppliers, relatively inelastic demand, and almost perfectly substitutable product makes it a close approximation of the perfect competition model.

A market is said to be one with perfect competition if:

1. There are a large number of small producers and consumers on a given market
2. None of the producers or consumers can influence the price on their own -- they are price takers
3. Goods and services are perfect substitutes -- they are homogeneous
4. All resources (including information) are perfectly mobile
5. Transaction costs are zero
6. The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium

This model is often criticised, especially by those economists who belong to the Austrian School as being unrealistic, as in many markets larger producers are more efficient than perfectly competitive smaller producers while transaction costs and information costs can never be zero (as they will involve using resources with alternative uses).

See also: Microeconomics, other market forms

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