ABSTRACT
This chapter examines more formally what is meant by competition and competitive markets. It constructs a theoretical market, called a perfectly competitive market, which has the most extreme characteristics in terms of competition. The chapter considers economic outcomes in such a market in both the short and the long run, and revisit the profit and welfare implications in each case. Perfectly competitive markets have the following characteristics: many buyers and sellers; homogeneous products; price taker; and free entry and exit. The chapter discusses how a perfectly competitive market transitions from its short-run equilibrium to its long-run equilibrium. In practice, firms in the real world rarely report zero profits, even in markets that are very competitive. It is very unlikely that a real-world market will meet the stringent criteria of perfect competition. For example, firms in the market might have slightly differentiated products or there might not be perfect information about prices.
