325 Keep These Things In Mind

The key points about Perfect Competition:

• All firms produce identical output (corn is corn).
• There are innumerable small firms in the industry and no one firm can have any influence over market price.
• The firms are price takers. The price for their output is established in the market by the interaction of all buyers and and all firms.
• Each firm can sell all the output they choose at only the existing market price- horizontal demand.
• Each firms produces at the point where MR=MC.
• Firms can make economic profits in the short run. This means they are receiving a price greater than the average cost of production.
• If this happens, new firms will enter the industry- there are no barriers to entry. When new firms enter, supply increases and price falls. Price keeps falling until all firms are just receiving a normal rate of return (no economic profits).

“Original document by Peter Turner licensed CC BY”