Perfect competition refers to the situation where there are many buyers and sellers exist in the market. All the firms are selling homogenous goods. Price is fixed by the equilibrium between market demand and supply. Firms and individuals are price taker. Individual firms or individual consumer cannot influence the price. Firms are easily enters and exists from the market.
In perfect competition, price (P), marginal revenue (MR) and average revenue (AR) are equal. This can be written as P = MR = AR. Marginal cost (MC) and supply are equal at the particular output level. The equilibrium occurs at the point where demand is equal to supply or marginal revenue equal to marginal cost. In the long run, this would occur at the minimum level of average cost Thus, in perfect competition, producer surplus and consumer surplus is reached its maximum.
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