Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand.
Requirements
Perfect competition requires that the following six parameters be fulfilled. In such a market, prices would normally move instantaneously to economic equilibrium.
Atomicity : An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.
Homogeneity: Goods and services are perfect substitutes; that is, there is no product differentiation. (All firms sell an identical product)
Perfect and complete information: All firms and consumers know the prices set by all firms (see perfect information and complete information).
Equal access: All firms have access to production technologies, and resources are perfectly mobile.
Free entry: Any firm may enter or exit the market as it wishes (see barriers to entry).
Individual buyers and sellers act independently: The market is such that there is no scope for groups of buyers and/or sellers to come together with a view to changing the market price (collusion and cartels are not possible under this market structure)
Behavioral assumptions of perfect competition are that:

• Consumers aim to maximize utility
• Producers aim to maximize profits.

To be exhaustive, note that some economists do not agree with this presentation of the model of perfect competition. Many reasons are advanced, but one of the main is that it focuses on unnecessary conditions (atomicity, perfect information...) while it does not allow an answer to the question : "If agents are price-takers, who sets the prices ?" Indeed, in this model, as firms and consumers can not set the prices, it can't be—as it is often said (e.g. below)—that it is the firms who fix them. So, actually, there is a need for a benevolent agent who proposes prices to firms and consumers and fixes the ones at which exchange will occur. They also think that the argument that a global entity called "the market" could fix the prices, when its constituents (producers and consumers) can not is greatly disturbing[. Above other criticism, there is also the lack of emphasis on the fact that no uncertainty about future prices or incomes, no transport cost, and no indivisibility can be integrated in this model.
Results

In the short-run, it is possible for an individual firm to make abnormal profit. This situation is shown in this diagram, as the price or average revenue, denoted by P is above the average cost denoted by C .

However, in the long run, abnormal profit cannot be sustained. The arrival of new firms in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point
The model is a description of one type of market structure, most closely approximating only a few markets, such as agriculture. In real-world markets, any of its assumptions may be violated. For example, firms will never have perfect information about each other. Its usefulness as a scientific construct may be judged by the range of market behavior explained by it and as a standard for comparison with other market structures.
In a perfectly competitive market, there will be allocative efficiency and productive efficiency.
Allocative efficiency occurs when price (P) is equal to marginal cost (MC), at which point the good is available to the consumer at the lowest possible price.
Productive efficiency occurs when the firm produces at the lowest point on the average cost curve (AC), implying it cannot produce the goods any more cheaply. This would be achieved in perfect competition, since if a firm was not doing it another firm would be able to undercut it by selling products at a lower price.
In contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn abnormal profit in the long run, which is to say that a firm cannot make any more money than is necessary to cover its economic costs. If a firm is earning abnormal profit in the short term, this will act as a trigger for other firms to enter the market. They will compete with the first firm, driving the market price down until all firms are earning normal profit, it could be said that abnormal profit is 'competed away'. On the other hand, if firms are making a loss, then some firms will leave the industry, reduce the supply and increase the price. Therefore, all firms can only make normal profit in the long run.
It is important to note that perfect competition is a sufficient condition for allocative and productive efficiency, but it is not a necessary condition. Laboratory experiments in which participants have significant price setting power and little or no information about their counterparts consistently produce efficient results given the proper trading institutions (Smith, 1987, p. 245).