Perfect Competition Perfect competition is a theory of idealized market structure used in economics to show the market with a high degree of competition given certain conditions. This essay aims to outline the assumptions and distinctive characteristics that form the perfectly competitive model and how this model can be used to explain the short- and long-term behavior of a perfectly competitive firm aiming to maximize profits and the implications of a further increase in these profits. In a perfectly competitive market every firm is a “Price Taker”, that is, prices and wages are determined by the market and the firm is so small compared to the size of the market that it cannot have any influence on the market price. For a market to be perfectly competitive there are some conditions that must be met. The first set of conditions for perfect competition applies to market structure. There are many small buyers and companies (suppliers), but none of them have influence on the market price since they are small compared to the market as a whole. This means that each of the suppliers in the industry is a price taker. Changing a firm's production will not affect the total supply of the market. The products provided in this market structure are homogeneous, which means that they are perfect substitutes for each other. This is another condition that makes each of the firms a price taker, since any increase in price would lead the buyer to turn to the next perfect substitute. For this condition to apply, it is also assumed that there is perfect information in the market for buyers so that they are aware of the price of each company in the industry. These conditions of the market structure allow the hypotheses of perfect competition to be satisfied. The first assumption is… middle of paper… not whether a company in a perfectly competitive industry defines a strategy to increase profit. The assumptions and conditions of perfect competition remove the fundamental requirement of an effective business strategy; innovation and entry deterrence.BibliographyKATZ, ML & ROSEN, HS (Third edition, 2005) Microeconomics (New York: McGraw-Hill)BEGG, D., FISHER, S. & DORNBUSCH, R. (Eighth edition, 2005) Economics (Berkshire: McGraw-Hill) FRANK, R.H. (Sixth edition, 2006) Microeconomics and Behavior (New York: McGraw-Hill) NELLIS, J.G. & PARKER, D. (Second edition, 1997) The Essence of Business Economics (Essex: Prentice Hall) NICHOLSON, W. (8th edition, 2002) Microeconomic Theory: Basic Principles and Extensions (USA: Thomson Learning)WIKIPEDIA. Perfect competition. (Available from the World Wide Web): http://en.wikipedia.org/wiki/Perfect_competition