There are five assumptions in the perfectly competitive model of markets: (1) goods are identical, rival, and excludable; (2) buyers and sellers have sufficiently information to make informed decisions; (3) there are no external effects; and two others. List the two other assumptions and discuss their significance in a sentence or two.

The other two assumptions are: 1) everyone is a price taker; and 2) there is free entry and exit. The price taking assumption implies the demand perceived by a seller is perfectly elastic. That is, they can sell as much or as little as they want without affecting the market price. Also, when the firm is a price taker, the profit maximizing rule: MR = MC, can be written P = MC since price equal marginal revenue in perfect competition. The market output where price equals marginal cost is the level the level of output where the sum of consumer and producer surplus is maximized. 

The free entry and exit assumption insures economic profits are zero in the long-run and more importantly, resources are perfectly mobile in response to a change in demand or supply conditions. If demand for a good increases, for example, firms will experience short-run profits, which will induce an expansion of the industry. The increased supply lowers price until profits are zero for the typical supplier.