Labor is costlessly mobile across industries within a country but is immobile across countries. Full employment of labor is also assumed. Below you will find a more complete description of each assumption along with a mathematical formulation of the model. Perfect Competition Perfect competition in all markets means that the following conditions are assumed to hold. This implies that when choosing output to maximize profit each firm takes the price as given or exogenous.
Firms choose output to maximize profit.
The rule used by perfectly competitive firms is to choose that output level which equalizes the price with the marginal cost. Output is homogeneous across all firms. This means that goods are identical in all of their characteristics such that a consumer would find products from different firms indistinguishable. We could also say that goods from different firms are perfect substitutes for all consumers. Free entry and exit of firms in response to profits.