9.2 The Theory of Perfect

Competition

The perfectly competitive market structure—usually referred to simply as
perfect competition —applies directly to a number of markets, especially
many agricultural and raw-materials markets. It also provides an
important benchmark for comparison with other market structures.

The Assumptions of Monopolistic Competition

Competition

In addition to the fundamental assumption that firms seek to maximize
their profits, the theory of perfect competition is built on a number of
assumptions relating to each firm and to the industry as a whole.

1. All the firms in the industry sell an identical product. Economists

say that the firms sell a homogeneous product.

2. Consumers know the characteristics of the product being sold

and the prices charged by various firms.

3. The level of each firm’s output at which its long-run average cost

reaches a minimum is small relative to the industry’s total output.

(This is a precise way of saying that each firm is small relative to

the size of the industry.)

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