The Canadian Competition Act of
LO 2
Four key assumptions of the theory of perfect competition are as
follows:
1. All firms produce a homogeneous product.
2. Consumers know the characteristics of the product and the
price charged for it.
3. Each firm’s minimum efficient scale occurs at a level of output
that is small relative to the industry’s total output.
4. The industry displays freedom of entry and exit.
Each firm in perfect competition is a price taker. It follows that each
firm faces a horizontal demand curve at the market price (even
though the market demand curve is downward sloping).