Understanding Perfect Competition: Market Equilibrium and Competition

1. Perfect Competiton

2. Competition • Perfect competition- ideal market where many firms produce same good or service • Market equilibrium and firms compete for your money & 4 Conditions • 1.Many buyers and sellers. • 2. Sellers offer identical goods • 3. Buyers and sellers are well informed • 4. Sellers able to enter and exit market freely

3. Conditions • Many participants allows supply and demand to ebb and flow- no individual can skew • Similar products or commodities-allows for quality comparison for consumer • Milk, notebook paper, gasoline • Informed- sellers know demand and buyers know product • Free entry/exit for firms encourages firms

4. Barriers • Barriers to entry-any factors that discourage a firms entry into a market • Imperfect competition- a condition where factors do no meet perfect competition • 1. Start up costs- expenses a firm must come up with to produce and sell goods • 2. Technology & knowledge- many firms/services require skill and tech know how

5. Price and Output • Perfectly competitive markets are efficient • Competition keeps prices and production costs low • Firms must use all capital to best of ability • In a perfectly competitive market- opportunity costs are accurate in all areas • Equilibrium price & market is very stable