How does perfect competition affect prices and behavior in a market economy?

Although perfect competition rarely occurs in real-world markets, it provides a useful model for explaining how supply and demand affect prices and behavior in a market economy. Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Companies earn just enough profit to stay in business and no more.

Do all firms in a market economy face competition from other firms?

Virtually all firms in a market economy face competition from other firms. In this chapter, we will be working with a model of a highly idealized form of competition called “perfect” by economists.

Can a firm in a perfectly competitive market react to prices?

A firm in a perfectly competitive market can react to prices, but cannot affect the prices it pays for the factors of production or the prices it receives for its output. The assumption that it is easy for other firms to enter a perfectly competitive market implies an even greater degree of competition.