Perfect Competition

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Perfect Competition
Perfect competition is the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry (Amacher, R., & Pate, J., 2013). The model of perfect competition is defined by many buyers and sellers to the extent that the supply of one firm makes a very insignificant contribution to the total supply. Both the sellers and buyers take the price as given. This implies that a firm in a perfect competitive market can sell any quantity at the market price of its product and so faces a perfectly price elastic demand curve (Bettie, B. R., & Lafrance, J. T., 2006).
Long Run Equilibrium for the Firm
The industry is in long-run equilibrium when
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The assumption of the free flow of information, and no pronounced barriers to entry means that innovations will right away be copied by all competitors so that in due course individual firms will not find it valuable to innovate. Cost effectiveness of the firms in the industry. Pure competition is allocative efficient because marginal revenue equals marginal l cost (P = MC), and is productively efficient because average costs are minimized.
Practical examples of firms in perfect competition
The assumptions of any perfectly competitive market are obviously at variance with the conditions which actually exist in real world markets. Some markets roughly conform to individual expectations, for example, the stock exchange is characterized by a fairly free-flow of information but the information requires expertise to comprehend. However, no markets exactly conform to the conjecture of the model, with peasant agriculture probably nearer to the mark.
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For example, any time surplus profits exist, there will be new entrants because they will make a profit. But as new firms enter, the market share enjoyed by each firm dwindles and their curves will shift to the Left. The costs will also be affected by the new entrants in three ways:
The new firms might make the cost resources go up. The cost curves might also be unaffected.
As new firms enter the cost curves might shift downwards because many sellers might force the costs of resources downward. But in the LR increasing costs are mostly likely. If there are increasing costs, then existing profits will be squeezed. Because of the reduction in an individual firm 's product, there will be a reduction in profits. As long as the area profits in the industry, more firm 's entry will stabilize when profits are ZERO. The losses might also cause the exit of the firms. The incentive to withdraw will cease when losses have been eliminated. Zero profits imply that LRAC = LRAR. Therefore LRAC is tangent to AR at Q1. But Q2 is the LR optimum output for the firm but with a negatively sloped AR curve. Zero profits imply that each firm will utilize a scale of plant smaller than optimum. Hence the free entry leads to EXCESS capacity for each

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