Perfect Competition in Markets

Introduction

Perfect Competition: An idealized market state with many buyers and sellers.
Goal: Understand and precisely define what perfect competition means in economics.

Many Buyers and Sellers
- Large number of participants on both sides.
Identical Products or Services
- All sellers offer identical products or services.
- Examples: Water, energy, and produce markets.
Perfect Information
- All participants know exactly what is happening in the market.
- Includes knowledge of prices and transactions.
No Barriers to Entry or Exit
- Idealized state where anyone can freely enter or leave the market.
- Real-world markets usually have some barriers (e.g., agriculture).

Market Analysis
- Market Diagram: Price vs. Quantity for the entire market.
  - Upward sloping supply curve.
  - Downward sloping demand curve.
  - Equilibrium price and quantity determined by the intersection.

Firm as Price Taker
- Cannot set prices; must accept market price.
- Perfect information ensures identical products/services.

Marginal Cost (MC) Curve
- Upward trending; indicates increasing cost for each additional unit produced.
Average Total Cost (ATC) Curve
- U-shaped; represents average cost of production.
Marginal Revenue (MR) Curve
- Flat line at market price; same as demand curve for firm.
- Also represents average revenue.

Optimal Production Point: Where MC intersects MR
- Producing more than this point leads to higher costs than revenue.

Realistic vs. Idealized Views
- In real life, fierce competition means firms undercut each other.
Applicability
- Not all markets should have perfect competition (e.g., medical field).
- Barriers can be important for quality and safety.