Perfect Competition

• Perfect competition is the opposite of a monopoly
• The characteristics of perfect competition are:

  • Many buyers and sellers (concentration ratio is 0)
  • The goods and services produced are homogenous
  • Their are no barriers to entry or exit
  • There is perfect information
  • The price is set by the market
• Perfect competition is a largely theoretical concept
• In the long-run, normal profits are made
• Pros of perfect competition are:

  • Allocative efficiency in the long-run
  • Productive efficiency in the long-run
  • X efficiency is achieved
• Cons of perfect competition are:

  • Dynamic efficiency is not achieved in the long-run (perfect competition can deliver static efficiency)
  • Product homogeneity is not in the interests of consumers
  • Product quality may be lower due to the drive to reduce costs