Principles of Economics/Perfect Competition

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Perfect competition[edit]

There are generally four types of markets that economists analyze:

  1. Perfect competition
  2. Monopoly
  3. Monopolistic competition
  4. Oligopoly.

The first one is the simplest and thus best suited to an introductory economics course; however, it is incredibly unrealistic; practically no industry operates under that system. However, it provides a variety of insights, and some industries, such as agriculture, come relatively close.

In perfect competition, the following are true:

  • All producers contribute insignificantly to the market. Their own production levels do not change the supply curve.
  • All producers are price takers. They cannot influence the market.
  • Producers may enter and exit the market freely.
  • Producers earn zero economic profits in the long run - in other words, the people involved earn as much as they can from their next best occupation.
  • Producers alter their quantity produced, and may enter or leave the market, to bring the market equilibrium point to the intersection between the demand and supply curve (more on this later).