Note on Perfect Competition - Perfect Competition Perfect...

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Perfect Competition Perfect competition exists when a market has many small buyers and sellers, a standardized product (means everyone is producing exactly the same thing), and there is free entry (it is easy to enter or leave the market). Although perfect competition is rare in the real world, the perfectly competitive model can be applied rather broadly because it approximates many market structures, and because it yields useful predictions about market responses in many markets that violate the assumptions of the model. Hence the characteristics of perfect competition are: 1. Large number of firms 2. All producing same product 3. Perfect information 4. Free entry and exit 1 and 2 imply that firms are price takers . They take the market price as given and cannot lower the price in an effort to sell more since if they did, all other firms would also lower their price. Firms cannot increase their price to increase their profits since if they increase their price everyone would switch to buying from their competitors. The demand curve for the perfectly competitive firm is perfectly elastic at the market price. Each unit of the commodity is sold at the same price. Thus P = MR for a perfectly competitive firm and the demand curve is also the MR curve. P MR Q
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For example, when a farmer is deciding how many acres of wheat to plant in a given year, he can take the market price of wheat as given. That price will not be affected by his
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