Perfect and Imperfect Competition

Abstract

So far we have been assuming that markets are perfectly competitive and consumers and firms are taking market prices as given. The assumption is justified by the supposition that there are very large number of consumers and firms so that market prices are not much affected by the actions of any single consumer or firm. As a result of perfect competition, equilibrium prices are equalized to marginal costs. Perfect competition is, however, an exceptional polar case, which should be regarded as an idealistic or limiting situation, since many firms are not taking prices as given and prices are, in general, different from marginal costs in the real world. While perfectly competitive markets are homogeneous and resemble one another as happy families, imperfectly competitive markets are heterogeneous and imperfect, like unhappy families, in many different ways.