Rational Self-interested consumers – This implies that the actions and decisions of the consumers would be rational and would aim to maximise their underlying utility and would purchase any good at the lowest available price.
Rational Profit Maximising Firms – Firms which are driven by the objective of maximising profits and hence would decide to produce at a point where MR=MC.
Competitive markets with price taking behaviour – This implies that while the firms do compete with each other but the price is decided by the industry and individual firms have to charge the same.
The perfect competition has been designed to describe a basic market structure and thus facilitate the description of other market structures which have different features to those identified. Hence, it serves as a basic market structure. The alternatives exist in the form of monopoly, oligopoly and other market structures.
Assumptions that underlie a perfect competition market
- No entry or exit barrier
- No product differentiation
- Firms as price taker
- Many buyers and many sellers
The vegetable market can be assumed as an example of perfect competition. Clearly, in this market there are many buyers and many suppliers or sellers. Also, the price of the vegetables is essentially dependent on the industry level demand and supply and individual firms cannot alter the same. Besides, considering the low capital involved, entry and exit barriers would not exist. Finally, the sellers are essentially selling similar kind of vegetables with minimal product differentiation.
The Boxing Day sales tell us that the law of demand remains intact. This is because there is a decrease in price and hence there is an increase in demand which leads to long queues. The law of demand requires that certain conditions need to be met. Some of these assumptions which remain intact even after the door is opened are highlighted below.
- Consumer income level does not change
- Consumer expectations about future prices do not change
- Consumer taste and preferences do not change
However, there may be a change in the related product which may impact the law of demand for certain products.
