Friday, August 8, 2014

What are the six conditions for perfect competition?

What are the six conditions for perfect competition?
These are the requirements for perfect competition:1) Many buyers, so that no buyer can by himself influence prices or production.2) Many sellers, so that no seller can influence the price by himself, but instead must offer a price that is competitive with those of his rival sellers. Sellers are "price takers," as opposed to "price makers."3) Homogenous goods, so that there are no competing alternatives to a good because they're all pretty much the same (e.g. nails). No matter whether you buy from Seller A or Seller B, you'll get the exact same thing.4) Both buyers and sellers have perfect information about the market, so errors in judgment or mere rumors won't influence the behavior of buyers and/or sellers.5) Low barriers to entry and exit: anyone can get into the business of selling a profitable good (or leave the business when the product is no longer profitable). So when one seller offers a new product that everyone wants to buy, under pefect competition, anyone else can get into the business of selling that product too. Suddenly the first seller will find he has a lot of competition in selling it. But "many sellers" is in keeping with perfect competition.6) Sellers aim to maximize profits: Sellers will keep selling to all the buyers out there as long as they can cover their marginal costs of producing the product they sell.

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