A market is an institution that facilitates and structures economic interactions among the buyers and sellers.

Four types of market structures have been defined based on the characteristics of the market:

1.the number of firms in the market,

2.the degree of product differentiation 

3.the ease of entry 

4.exit of firms into and out of the market.

Perfect Competition: a market for the exchange of identical products, in which there are many sellers and buyers, all of whom have perfect information.

A producer is a price-taker when its decision cannot affect the market price.

A price taker firm can`t influence the market price because its production is an insignificant part of the total market.

1.There are many firms; a single firm produces and sells a tiny fraction of the total market sold to many consumers.

2.Producers and consumers are well informed about the quality and price of the good in question.

3.Firms produce and sell an identical product.

4.There are no restrictions on entry into (or exit from) the market, and established firms don`t have any specific advantage over new firms.

Sunk Cost: an expenditure that was incurred in the past and is irreversible in the short-run.

The main aim of a perfectly competitive firm is to maximize economic profit. A perfectly competitive price-taker firm must decide which technology to adopt and what quantity to produce in the short run along with deciding whether to exit or stay in a market in the long run.

Total Revenue: the total amount of money received by a seller, which is equal to price times quantity sold.

Marginal Revenue: the additional revenue obtained by selling one more unit.

The average revenue equals the price of the product not only for a perfectly
competitive firm but also for all types of firms.

In a perfectly competitive market, marginal revenue equals price; P=MR

If the price is less than the average variable cost at its lowest point, the firm will not be able to continue to produce.

Perfectly competitive market equilibrium: the market equilibrium in a perfectly
competitive market in which the economic profit of each individual seller is zero, and there is no incentive for entry or exit.

In the long run, because of free entry and exit, all firms in a particular industry make normal economic profit and in the long-run equilibrium, no producer has an incentive to enter or exit.

Economic efficiency is the use of scarce resources—the labor force, natural resources and land—that will yield the highest possible amount of output or the production of what people demand using the least amount of input.

In economics, efficiency means production and allocation efficiency.

Production efficiency refers to a production level when it is produced at the lowest point on the long run average cost curve where marginal cost equals AC.

In a perfectly competitive market, firms produce at the lowest possible long-run average cost. This means consumers will pay the lowest possible price.

The most important implication of the perfect competition analysis is that each firm acts in an economically efficient manner. In the long run, inefficient firms will be forced to exit the market