• Firms are Price takers. There are so many firms in the industry that each one produces an insignificantly small portion of total industry supply, and therefore has no power whatsoever to affect the price of the product. It faces a horizontal demand 'curve' at the market price: the price determined by the interaction of demand and supply in the whole market.
• There is complete freedom of entry of new firms into industry. Existing firms are unable to stop new firms setting up in business. Setting up a business takes time, however. Freedom of entry, therefore, applies in the long run. An extension of this assumption is that there is complete factor mobility in the long run. If profits are higher than elsewhere, capital will be freely attracted into that industry. Likewise if wages are higher than for equivalent work elsewhere, workers will freely move into that industry and will meet no barriers.
• All firms produce an identical product. (The product is homogeneous) There is therefore no branding or advertising.
• Producers and consumers have perfect knowledge of the market. That is, producers are fully aware of prices, costs and market opportunities. Consumers are fully aware of the price, quantity and availability of product.

These assumptions are very strict. Few, if any, industries in the real world meet these conditions. Certain agricultural markets are perhaps the closest to perfect competition. The market for fresh vegetables is an example.

The model can be used as a standard against which to judge the shortcomings of real-world industries. It can help government to formulate policies towards industry.

Taken from John sloman Economics Fourth edition

- - Yingying