Overview
This lesson covers the characteristics of a perfectly competitive market, including definitions, key features, and exam-related distinctions from other market structures.
Definition and Key Features of Perfect Competition
- A perfectly competitive market has many buyers and sellers selling a homogeneous (identical) product.
- No single firm or buyer can influence the market price; all are "price takers."
- Examples include agricultural markets like maize and apples.
Criteria for Identifying Perfect Competition
- Do not rely on only one criterion (e.g., many sellers); check for multiple features like homogeneous products and free entry.
- Other market structures can also have many buyers and sellers.
Nature of Product
- The product is standardized or homogeneous (e.g., apples from different provinces are indistinguishable).
- Heterogeneous products (e.g., branded food) are not part of perfect competition.
Market Entry and Exit
- Entry and exit from the market are free and easy; no significant barriers exist.
- Firms can join or leave the market without restriction.
Collusion and Price Setting
- Collusion is nearly impossible due to the large number of firms.
- Firms cannot control prices; market price is set by demand and supply.
Information and Price Control
- Information is complete and perfectly shared among buyers and sellers.
- Firms have no control over price and must accept the prevailing market price.
Demand Curve
- The individual firm faces a horizontal demand curve (perfectly elastic demand).
Long-Run Profits and Efficiency
- In the long run, firms make only normal profit due to free entry and exit.
- Firms achieve both productive and allocative efficiency.
Decision Making and Market Power
- A single firm's decisions do not affect other firms in the market.
- No individual firm possesses market power.
Key Terms & Definitions
- Perfect Competition — A market with many buyers and sellers offering a homogeneous product and no firm controlling price.
- Homogeneous Product — An identical product offered by all firms in the market.
- Price Taker — A firm that must sell at the prevailing market price.
- Normal Profit — The minimum profit necessary to keep a firm in business in the long run.
- Productive Efficiency — Producing goods at the lowest possible cost.
- Allocative Efficiency — Resources are allocated such that consumer and producer surplus are maximized.
Action Items / Next Steps
- Complete the activity: With reference to the number of buyers and sellers in perfectly competitive markets, explain where market power exists.
- Answer: Is the JSE (Johannesburg Stock Exchange) an example of a perfectly competitive market? Motivate your answer.