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Perfect Competition - Meaning, and Main Features In Economics

square What is Perfect Competition ? Meaning ↓

Perfect Competition is a market structure where there is a perfect degree of competition and single price prevails.

The concept of Perfect Competition was introduced by Dr. Alfred Marshall.

Perfect Competition

Image Credits © Welker's Wikinomics.

Nothing is 100% perfect in this world. So, this states that perfect competition is only a theoretical possibility and it does not exist in reality.

square Main Features of Perfect Competition ↓

The following are the characteristics or main features of perfect competition :-

1. Many Sellers

In this market, there are many sellers who form total of market supply. Individually, seller is a firm and collectively, it is an industry. In perfect competition, price of commodity is decided by market forces of demand and supply. i.e. by buyers and sellers collectively. Here, no individual seller is in a position to change the price by controlling supply. Because individual seller's individual supply is a very small part of total supply. So, if that seller alone raises the price, his product will become costlier than other and automatically, he will be out of market. Hence, that seller has to accept the price which is decided by market forces of demand and supply. This ensures single price in the market and in this way, seller becomes price taker and not price maker.

2. Many Buyers

Individual buyer cannot control the price by changing or controlling the demand. Because individual buyer's individual demand is a very small part of total demand or market demand. Every buyer has to accept the price decided by market forces of demand and supply. In this way, all buyers are price takers and not price makers. This also ensures existence of single price in market.

3. Homogenous Product

In this case, all sellers produce homogeneous i.e. perfectly identical products. All products are perfectly same in terms of size, shape, taste, colour, ingredients, quality, trade marks etc. This ensures the existence of single price in the market.

4. Zero Advertisement Cost

Since all products are identical in features like quality, taste, design etc., there is no scope for product differentiation. So advertisement cost is nil.

5. Free Entry and Exit

There are no restrictions on entry and exit of firms. This feature ensures existence of normal profit in perfect competition. When profit is more, new firms enter the market and this leads to competition. Entry of new firms competing with each other results into increase in supply and fall in price. So, this reduces profit from abnormal to normal level.

When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So remaining firms raise their prices and their profits go up. So again this ensures normal level of profit.

6. Perfect Knowledge

On the front of both, buyers and sellers, perfect knowledge regarding market and pricing conditions is expected. So, no buyer will pay price higher than market price and no seller will charge lower price than market price.

7. Perfect Mobility of Factors

This feature is essential to keep supply at par with demand. If all factors are easily mobile (moveable) from one line of production to another, then it becomes easy to adjust supply as per demand.

Whenever demand is more additional factors should be moved into industry to increase supply and vice versa. In this way, with the help of stable demand and supply, we can maintain single price in the Market.

8. No Government Intervention

Since market has been controlled by the forces of demand and supply, there is no government intervention in the form of taxes, subsidies, licensing policy, control over the supply of raw materials, etc.

9. No Transport Cost

It is assumed that buyers and sellers are close to market, so there is no transport cost. This ensures existence of single price in market.


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1 Comment:

  1. Robert Boahen said...

    Thanks very much for the vivid explanation of this perfect competition of the market structure. My understanding is full now.Thanks

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