THE THEORY OF THE FIRM UNDER PERFECT COMPETITION
Perfect competition is a type of market scenario that has several key characteristics.
1.Many Buyers And Sellers: The market is full of buyers and sellers. No single buyer or seller is big enough to influence the market prices.
2.Identical Products: Every firm in the market is selling the exact same product. There’s no difference in quality, features, or branding.
3.Easy Entry And Exit: Any new firm can enter the market easily, and if a firm wants to leave the market, it can do so without any hassle. This availability to come and go keeps the market vibrant with many firms.
4.Perfect Information: Everyone in the market knows the prices, quality, and other relevant details about the product. There are no secrets, which helps in making informed decisions.
In a perfectly competitive market, firms and buyers are price-takers. They have to accept the market price as it is because there are many sellers selling identical products.
For a firm, it cannot charge higher than the market price because buyers can easily go to another seller for the same product at a lower price. However, it can sell unlimited quantities at or below the market price since there are many buyers.