To define:
Concept Introduction:
Perfect competition:
Perfect competition is a market structure where competition is at its greatest possible level. It has a large number of buyers and sellers, each firm produces a homogenous product, there is free entry and exit of firms, and absolutely there is no advertisement cost.
Explanation of Solution
Perfect competition is considered by economists as a bench for three reasons.
In both short-run and long-run, price is equal to the marginal cost and thus allocative efficiency is achieved. Moreover, at this price, the
Productive efficiency:
This occurs when the equilibrium output is supplied at a minimum average cost and this is attained in the long-run for a competitive market.
Economic efficiency:
The long-run of perfect competition exhibits optimal level of economic efficiency, and for this to be achieved, all of the conditions of perfection competition must hold true.
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