Perfect Competition

Was embarrased I couldn't recall exactly this was earlier, I had first learned it while preparing for school exams. Here is a refresh for you:

Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices.

Perfect competition requires that the following five parameters be fulfilled. In such a market, prices would normally move instantaneously to equilibrium. However, perfect competition does not rule out economic bubbles, in which the concept of equilibrium prices is not meaningful.

Atomicity
An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.

Homogeneity
Goods and services are perfect substitutes; that is, there is no product differentiation.

Perfect and complete information
All firms and consumers know the prices set by all firms (see perfect information and complete information).

Equal access
All firms have access to production technologies, and resources (including information) are perfectly mobile.

Free entry
Any firm may enter or exit the market as it wishes (see barriers to entry).

The model is in most cases only a distant approximation of real markets, with the possible exception of certain large street markets. In general, few, if any of the conditions listed above will apply in real markets. For example, firms will never have perfect information about each other, and there will always be some transaction costs. In a perfectly competitive market, there will be both allocative efficiency and productive efficiency.

• Allocative efficiency occurs when price (P) is equal to marginal cost (MC), at which point the good is available to the consumer at the lowest possible price. It describes an allocation of resources such that no possible reallocation could make one agent (producer or consumer) better off without making at least one other agent worse off.
• Productive efficiency occurs when the firm produces at the lowest point on the average cost curve (AC), implying it cannot produce the goods any more cheaply. This would be achieved in perfect competition, since if a firm was not doing it another firm would be able to undercut it by selling products at a lower price. Achievement of a specific level of output or objective using the most cost-effective means

In contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn abnormal profit in the long run, which is to say that a firm cannot make any more money than is necessary to cover its costs. If a firm is earning abnormal profit in the short term, this will act as a trigger for other firms to enter the market. They will compete with the first firm, driving the market price down until all firms are earning normal profit. On the other hand, if firms are making a loss, then some firms will leave the industry, reduce the supply and increase the price. Therefore, all firms can only make normal profit in the long run.

Example:
A number of strawberry stands opposite each other on a road selling punnets of strawberries freshly picked by their attendant from the nearby field.