Final answer:
In a market with perfect competition, the market price is set by the supply and demand equilibrium, and firms are price takers. This market structure ensures allocative and productive efficiency in the long-run equilibrium. Unlike perfect competition, other market structures like monopoly or oligopoly allow firms more influence over prices, which may lead to inefficiencies.
Step-by-step explanation:
Supposing that perfect competition is a good approximation of the market structure, the market price is determined by the intersection of the industry supply and demand curves. This means that firms are price takers and must accept the market price. In perfect competition, a long-run equilibrium is achieved when both allocative efficiency and productive efficiency are met, resulting in a situation where price equals marginal cost and firms produce at the minimum of average total cost.
Practical examples of markets that come close to perfect competition include agricultural markets, where products like corn are highly interchangeable and the market determines the price. If a firm in a perfectly competitive market sets a price higher than the equilibrium, buyers will choose the product from other suppliers, and if it sets a lower price, the firm misses out on potential revenue.
By contrast, in other market structures such as monopoly, monopolistic competition, and oligopoly, firms have greater pricing power and can influence prices, leading to outcomes that may not achieve productive and allocative efficiency.