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Indeed, if everyone is price taker, there is the need for a benevolent planner who gives and sets the prices, in other word, there is a need for a "price maker". Therefore, it makes the perfect competition model appropriate not to describe a decentralized "market" economy but a centralized one.
As all firms in the market are price takers, they essentially hold zero market power and must accept the price given by the market. A perfectly competitive market is logically impossible to achieve in a real world scenario as it embodies contradiction in itself and therefore is considered an idealised framework by economists. [14]
Perfect competition refers to a type of market where there are many buyers and sellers that feature free barriers to entry, dealing with homogeneous products with no differentiation, where the price is fixed by the market. Individual firms are price takers [3] as the price is set by the industry as a whole. Example: Agricultural products which ...
Monopoly is the opposite to perfect competition. Where perfect competition is defined by many small firms competition for market share in the economy, Monopolies are where one firm holds the entire market share. Instead of industry or market defining the firms, monopolies are the single firm that defines and dictates the entire market. [10]
If the industry is perfectly competitive (as is assumed in the diagram), the firm faces a demand curve that is identical to its marginal revenue curve (), and this is a horizontal line at a price determined by industry supply and demand.
The first states that in economic equilibrium, a set of complete markets, with complete information, and in perfect competition, will be Pareto optimal (in the sense that no further exchange would make one person better off without making another worse off). The requirements for perfect competition are these: [1]
In a perfectly competitive market, price discrimination is not possible, because attempts to increase price for some buyers would be undercut by the competition. [ 24 ] Consumer surplus need not exist, for example in monopolistic markets where the seller can price above the market clearing price.
Without barriers to entry and collusion in a market, the existence of a monopoly and monopoly profit cannot persist in the long run. [1] [3] Normally, when economic profit exists within an industry, economic agents form new firms in the industry to obtain at least a portion of the existing economic profit.