2. Certain conditions are necessary for the
functioning
of an efficient market:
a large number of buyers and sellers each acting
independently according to their own self-
interest, perfect information about what is
being traded,
and freedom of entry and exit to
and from the market.
3. Add to this list that firms deal
in identical products and that they are “price
takers,” and you no have perfect
competition.
Identical products mean that there are no
real differences in the output of firms.
4. They are all making and selling the
same stuff. Think of things like wheat,
corn, rice, barley, and whatever else goes
into making breakfast cereal. Wheat grown
by one farmer is not significantly different
from wheat grown by another farmer.
5. Perfectly competitive markets are what
economists call allocatively efficient.
Consumers get the most benefit at the
lowest price without creating any loss for
producers. Perfect competition is also
productively efficient because in the long
run, firms produce at the lowest total cost per
unit.
6. Economists refer to firms as “pricetakers” when
a firm does not set the price
of its output but instead sells its
output at the market price. Remember, one
outcome when markets have many different
small buyers and sellers is that none are
able to influence the price of the product.
