![]() Imperfect competition was a theory created to explain the more realistic kind of market interaction that lies in between perfect competition and a monopoly. In the 1950s, the theory was further formalized by Kenneth Arrow and Gérard Debreu. Léon Walras gave the first rigorous definition of perfect competition and derived some of its main results. The theory of perfect competition has its roots in late-19th century economic thought. ![]() At this point, price equals both the marginal cost and the average total cost for each good (P = MC = AC). Competition reduces price and cost to the minimum of the long run average costs. However, in the long-run, productive efficiency occurs as new firms enter the industry. In the short-run, perfectly competitive markets are not necessarily productively efficient, as output will not always occur where marginal cost is equal to average cost (MC = AC).The abandonment of price taking creates considerable difficulties for the demonstration of a general equilibrium except under other, very specific conditions such as that of monopolistic competition. This is also the reason why a monopoly does not have a supply curve. It allows for derivation of the supply curve on which the neoclassical approach is based. This implies that a factor's price equals the factor's marginal revenue product. In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P = MC). ![]()
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