4. The industry is characterized by freedom of entry and exit; that is,
any new firm is free to enter the industry and start producing if it
so wishes, and any existing firm is free to cease production and
leave the industry. Existing firms cannot block the entry of new
firms, and there are no legal prohibitions or other barriers to
entering or exiting the industry.The first three assumptions imply that each firm in a perfectly competitive
industry is a price taker , meaning that the firm can alter its output and
sales without affecting the market price of its product. Thus, a firm
operating in a perfectly competitive market has no market power. It must
passively accept whatever happens to be the market price, but it can sell
as much as it wants at that price.
Our Saskatchewan and Manitoba wheat farmers provide us with good
illustrations of firms that are operating in a perfectly competitive market.
Because each individual wheat farmer is just one of thousands of
producers who are all growing the same product, one firm’s contribution
to the industry’s total production is a tiny drop in an extremely large
bucket. Each firm will correctly assume that realistic variations in its
output have no effect on the market price of wheat. Thus, each firm,
knowing that it can sell as much or as little as it chooses at that price,
adapts its behaviour to a given market price of wheat. Furthermore, there
is nothing that any one farmer can do to stop another farmer from
growing wheat, and there are no legal deterrents to becoming a wheat
farmer. Anyone who has enough money to buy or rent the necessary
land, labour, and equipment can become a wheat farmer.