Cambridge International as and a level Economics Ebook

Perfect competition
Perfect competition is a theoretical extreme. Th
e main 
point of studying this model is that it acts as a benchmark 
for real-world competition. Th
e performance of actual 
fi rms can be judged against this most effi
cient model. 
(Some of the characteristics are shared by the next most 
competitive model, which somewhat confusingly is known 
as monopolistic competition.)
Perfect competition has the following characteristics:
■
There is a large number of buyers and sellers who have 
perfect knowledge of market conditions and the price that 
is charged.
■
No individual firm has any influence on the market price. 
Firms are described as being price takers. The ruling price is 
determined by the forces of market demand and the output 
of all the firms.
■
The products are homogeneous or identical. This means 
that they are all of the same quality and are identical in the 
eyes of the consumer.
Large
Number of firms
Small
None
Barriers to entry
High
None
Perfect
competition
Monopolistic
competition
Oligopoly
Control over price charged
Full
Monopoly
Figure 7.13
 
 
The spectrum of competition
160
Cambridge International A Level Economics

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Oligopoly
Tacit collusion
Cartel
Price fixing
Market share
fixing
Risk-avoidance
behaviour
Monopoly
Multinationals
Competitive
behaviour
Perfect competition
Price
discriminating
monopoly
Monopolistic competition
Large number of differentiated products
Natural monopoly
Lack of close substitutes
New
entrants
You are now entering
imperfect competition