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Determination of Prices

Features of Perfect Competition

There are various market forms like perfect competition, monopoly, monopolistic competition, and oligopoly. Suppliers provide commodities based on the market demand, their cost and revenue functions. Each market structure leads to a different demand and revenue function. In this article, we will look at the features of perfect competition.

Browse more Topics under Determination Of Prices

  • Intro to Determination of Prices
  • Changes in Demand
  • Changes in Supply
  • Simultaneous changes in Demand and Supply
  • Price Determination under Perfect Competition
  • Long Run Equilibrium of Competitive Firm and Industry
  • Monopoly Market
  • Monopolist’s Revenue Curve
  • Price Discrimination
  • Monopolistic Competition
  • Oligopoly
  • Kinked Demand Curve

What is a Perfectly Competitive Market?

Before we look at the features, look at the following example: You go to a vegetable market and inquire about the price of tomatoes from a shopkeeper. He quotes Rs. 5 per kg. You go to a few more shops and enquire from many shopkeepers. They all quote the same rate. Based on this, you make the following observations:

  1. There are many buyers and sellers in the tomatoes market
  2. All shopkeepers are selling tomatoes at Rs. 5 per kg.
  3. There is product homogeneity. This means that all tomatoes appear to the same and you are unable to distinguish one from the other. This is an example of a perfectly competitive market.

features of perfect competition

Features of Perfect Competition

An essential aspect of perfect competition is the absence of any monopolistic element. These are the three essential features of perfect competition:

  1. The number of buyers and sellers in the market is very large. These buyers and sellers compete among themselves. Due to the large number, no buyer or seller influences the demand or supply in the market.
  2. The commodity sold or bought is homogeneous. In other words, goods produced by different firms are identical in nature.
  3. Firms can enter or exit the market freely.

Apart from these essential features, there are some more conditions attached to the perfect competition.

Additional Features of Perfect Competition

  1. Buyers and Sellers have a perfect knowledge of:
    1. the quantities of stock of goods in the market
    2. the conditions of the market
    3. prices at which transactions of sale or purchase are happening.
  2. There are facilities that help the movement of goods from one center to another.
  3. Buyers have no preference between different sellers.
  4. Also, buyers have no preference between different units of the commodity offered for sale.
  5. Sellers have no preference between different buyers.
  6. At any given point in time, the goods are bought or sold at a uniform price. In other words, all firms must accept the price determined by the market forces to total demand and supply.

When a market operates under the condition of perfect competition, buyers and sellers have perfect knowledge and perfect mobility. Therefore, if a seller tries to raise the price above that charged by others, he loses customers. The stock market is a great example of perfect competition.

Solved Question on Features of Perfect Competition

Q1. Which of the following among them is not a condition of perfect competition?

  1. A large number of firms.
  2. Perfect mobility of factors.
  3. Informative advertising to ensure that consumers have good information.
  4. Freedom of entry and exit into and out of the market.

Answer: In a perfect competition, the number of firms is large, products are homogeneous, factors are mobile, and everyone has the liberty to enter and exit the market. Also, monopolistic combinations are not possible. Therefore, the correct answer is Option c – Informative advertising to ensure that consumers have good information. All other options are essential for a perfect competition.

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