In perfect competition, there are a large number of sellers who are all selling an identical product. It is easy for firms to enter or leave the market. In perfect competition, no firm can set a price that is higher than the others' prices and no economic profit can be made. Perfect competition does not truly exist in the real world -- it is more of an ideal state that we talk about to make a point, just as how physics teachers talk about situations where there is no friction. With these characteristics in mind, here are some possible essay questions:
- List the characteristics of perfect competition (large number of firms, homogenous product, easy entry and exit) and tell why each of these characteristics is necessary in order for perfect competition to exist.
- Explain why firms in perfect competition cannot make an economic profit.
- Give one example of a real life market that comes close to being in perfect competition. Why is it close and why doesn't it actually make it all the way to being perfectly competitive?