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Analysis of Market

Perfect Competition

In our everyday lives, we use the term competition to signify rivalry. However, in the economic theory, perfect competition implies no rivalry among firms. In this article, we will offer a perfect competition definition and look at the salient features of perfect competition.

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Perfect Competition Definition

Perfect Competition is defined as a market structure characterized by a complete absence of rivalry among individual firms. In other words, Perfect Competition definition means a market structure where there is a perfect degree of competition and a single price prevails.

perfect competition definition

                                                                                                                                                  Source: Pixabay

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Perfect Competition Definition – Prof. Benham

A market is said to be perfect when all the potential sellers and buyers are promptly aware of the price at which transactions take place and all of the offers made by other sellers and buyers, and when any buyer can purchase from any seller, and vice versa.”

Perfect Competition Definition – Prof. Marshall

The more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market.

A Perfect Competition is a hypothetical market structure where every seller takes the market prices as the price of his own product. Further, firms cannot influence the market price either alone or as a group.

Primary Features of Perfect Competition

Homogeneous Product

In perfect competition, a buyer cannot distinguish between the products of two firms. There are no distinctive features associated with the product of a specific firm. In fact, the product is homogeneous and undifferentiated. For the buyer, the products that one firm supplies are a perfect substitute for those which any other firm supplies.

A Large Number of Sellers

There are a large number of firms in perfect competition. In this market structure, no individual firm can significantly influence the total supply of the industry and thereby affect the price of the product. Therefore, every firm is a price taker and can sell any quantity of its own product at the market price.

Further, for a seller, the demand for his product is perfectly elastic. Also, the maximum quantity that a firm can supply is insignificantly small as compared to the aggregate supply of the industry as a whole.

A Large Number of Buyers

A Perfect Competition is also characterized by a large number of buyers. These buyers compete with each other for the available supply. Their number is so large that any single buyer cannot change the total demand in the market or affect the price of the product. Every individual buyer is also a price taker. A buyer can buy any quantity of the product he likes at the market price.

Full Knowledge of Market

In perfect competition, it is assumed that all buyers and sellers have the complete knowledge of the prevailing price of the product. Further, they are also aware of the prices that the sellers want and the buyers offer. This knowledge helps buyers and sellers to use any opportunity to strike a good bargain.

Economic Rationality

Another feature of perfect competition is economic rationality. In simple words, it means that every buyer and seller is motivated by his own economic interest before buying or selling. Coupled with the assumption of the perfect knowledge, this means that a uniform price prevails in the market.

No Transaction Costs

In perfect competition, the buyers and sellers do not incur any transaction costs. The buyer pays the price that is exactly equal to the price that the seller receives. There are no additional transaction costs.

In other words, the seller incurs no additional costs like advertisements, etc. since his product is not differentiated from the other sellers.

Free Entry and Exit

Another important feature of perfect competition is free entry and exit. It means that any firm can close down and the leave the industry or any new firm can enter at any time.

Further, this does not involve any legal, institutional, or technical hurdle. Similarly, buyers can enter and exit the market whenever they like too.

Perfect Mobility of factors of production

The factors of production are perfectly mobile in perfect competition. This means that they can freely move from one firm to another. Also, workers are free to move between different firms. Therefore, people can learn skills easily.

No Government Regulation

In perfect competition, there is no government regulation. In other words, the government has no interference in this market structure in terms of the tariff, subsidies, etc.

Solved Question Perfect Competition

Q1. What is the Perfect Competition Definition and what are its primary features?

Answer:

Perfect Competition is a market structure characterized by a complete absence of rivalry among individual firms. It means a market structure where there is a perfect degree of competition and a single price prevails.

The primary features of perfect competition are:

  • Homogeneous Product
  • A large number of sellers
  • A large number of buyers
  • Full knowledge of the market
  • No transaction costs
  • Free entry and exit
  • Economic Rationality
  • Perfect mobility of the factors of production
  • No government regulation
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