Perfect competition is a theoretical market structure where a large number of small buyers and sellers interact in a market, all selling or buying a homogeneous product. In a perfectly competitive market, no single buyer or seller has the power to influence the price of the product, and the price is determined solely by the forces of supply and demand.
Perfect competition assumes that there are no barriers to entry, meaning that any firm can enter the market and start producing the product, and there are no barriers to exit, meaning that firms can leave the market if they are not making a profit.
In a perfectly competitive market, all buyers and sellers have perfect information about the market, including prices, quantities, and quality of goods and services.
Characteristics of Perfect Competition Market
The following are the important features of perfect competition:
1. Large Number of Buyers and Sellers
There is a large number of buyers and sellers of a commodity under this market structure.
No individual seller or buyer is in a position to influence the market price as they sell or purchase a small portion of the total stock available in the market.
Hence, sellers and buyers accept the price prevailing in the market and take decisions accordingly.
2. Homogeneous Product
The product sold by various firms in this market is identical. An identical product means that each unit of the product is the perfect substitute.
This ensures that all firms face the same demand curve and there is no scope for product differentiation.
3. Free Entry and Exit of Firms
In this market, each individual firm is free to enter and exit the industry whenever they are interested.
Thus, there are no restrictions on the entry and exit of firms in the industry.
4. Perfect Mobility of Factors of Production
All the factors of production have perfect mobility.
Whenever there is a change in their remuneration they can move from low-paid remuneration to highly-paid remuneration in other industries under this type of market.
5. Perfect Information
In a perfectly competitive market, all buyers and sellers have perfect information about the market.
They know the market price, the quality of the product, and the cost of production.
This ensures that all firms are price-takers and there is no scope for any firm to make abnormal profits.
6. Price Taker Behavior
In a perfectly competitive market, all firms are price takers, meaning that they have no control over the market price.
Instead, they must accept the market price and adjust their production accordingly.
7. Zero Transaction Costs
In a perfectly competitive market, there are no transaction costs involved in buying or selling the product.
Buyers and sellers can easily find each other and enter into transactions without incurring any additional costs.
This ensures that the market price reflects the true value of the product.
8. Perfect Knowledge of Market Conditions
Under this type of market buyers and sellers have perfect knowledge regarding the price of the product.
Its availability and who is selling the product and who is buying the product.
Perfect knowledge leads to the existence of a single price in the market.
9. No Barriers to Entry or Exit
In a perfectly competitive market, there are no barriers to entry or exit.
New firms can enter the market easily and existing firms can exit the market without incurring any significant costs.
This ensures that firms cannot make abnormal profits in the long run.
10. No Externalities
Perfect competition assumes that there are no externalities, which means that the actions of one producer or consumer do not affect the welfare of others in the market.
This ensures that there is no market failure due to externalities and that the market is efficient.
11. Perfect Mobility of Factors of Production
In a perfectly competitive market, all factors of production are perfectly mobile.
This means that factors like labor and capital can move freely from one firm to another, as per their demand and supply in the market.
12. Profit Maximization
In a perfectly competitive market, all firms aim to maximize their profits by producing at the point where marginal cost equals marginal revenue.
This ensures that all firms produce at an efficient level of output, where the cost of producing an additional unit of output equals the revenue generated by selling that unit.
13. No Transport Cost
Under this market, there is no transport cost because the market is adjusting to the area.
Thus, A commodity is easily carried away from one part of the market to another and there is no need for transport costs.
14. Price Determined by Market Forces
In a perfectly competitive market, the price of the product is determined solely by the forces of supply and demand.
No single buyer or seller can influence the market price.
The market price reflects the equilibrium price, where the quantity demanded equals the quantity supplied.
15. Absence of Artificial Restrictions
Under this type of market, there is the non-existence of any artificial restrictions on the demand and supply of the product, prices of inputs and products, and price determination.
Perfect competition is a market structure that ensures efficiency, fairness, and welfare maximization.
Its characteristics, including a large number of buyers and sellers, homogeneous products, perfect information, free entry, and exit, no externalities, price takers, profit maximization, zero economic profits in the long run, and allocative and productive efficiency, ensure that the market is efficient and that resources are allocated to their most valued uses.
While perfect competition is an ideal market structure, it is rarely observed in reality, and most markets have some degree of imperfection.