Chapter 9: Limited Decision-Making in Perfect Competition

Perfect Competition
 When economists use the term perfect competition, they don’t refer to competition at all.
 You can’t set your product’s price and you have no incentive to advertise or innovate.
 As the owner of a firm in perfect competition, you choose to produce the quantity of
output that maximizes profit; however, you can’t determine price.
 Examples, market for agricultural commodities, such as wheat, corn and soybeans.

Identifying the Characteristics of Perfect Competition

 A large number of firms
- Your firm is one of a large number of firms, so it produces a negligible amount of
the total quantity of the commodity provided in the market.
 Standardized commodity
- All firms produce a standardized or homogeneous commodity.
 Easy entry and exit
- There are no barriers to entry in perfect competition.
 Perfect information
- The good’s price and quality are known to all buyers and sellers.

Making an Offer the Firm Can’t Refuse: Market Price

 When a firm is a price taker, price is established through supply and demand in the
market.
 The perfectly competitive firm must sell its product at the market-established price.
 The firm’s owner can’t set price.

Competing with Advertising

 In a perfectly competitive market, advertising is a waste of money.