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Features of Perfect Competition

Last updated date: 23rd Apr 2024
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What are the Key Features of Perfect Competition?

A Perfect Competition is a kind of market in which the number of buyers and sellers is very large. All are occupied with buying and selling products that are homogenous and do not have any artificial restrictions. The main features of perfect competition are performed by possessing perfect knowledge of the market. 

In other words, a market is said to be perfect when the potential buyers and sellers are well aware of the prices and transactions that take place. Perfect competition is accompanied by efficient allocation of economic resources. Market structure is determined by the size and number of firms in a market. The major types of market structure include Monopoly, Monopolistic competition, Oligopoly, and Perfect Competition.

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What are the Main Features of Perfect Competition? 

The main features of perfect competition have several important characteristics. They are as follows:

  • One of the main features of perfect competition is that all producers contribute significantly to the market. Their production and supply levels do not change the curve. All of these producers are price takers. They do not influence the market. If any company or firm tries to raise its prices, the consumer would instead buy from a competitor at a lower price. 

  • The products are homogenous, and the producers enter and exit the market freely. Both the buyers and sellers have full knowledge of the market. Be it the price, utility, quality or production method of products. 

  • There are no additional transaction costs. In the long run, producers earn zero economic profits. There are no transportation costs, and absolute uniformity is maintained in the market. 

  • Another key feature of perfect competition is the perfect mobility of the products and goods. Goods should be allowed to move to places where they can be sold at the highest price. There should not be any key relationship between the sellers and buyers. The seller should not be picky while accepting the price of a commodity. 

  • The sellers and buyers must have relevant information to make rational decisions. These decisions may be related to the cost of the product or the selling price of the final product. 

What are some Additional Features of a Perfect Competition Market? 

Suppliers provide commodities based on the costing price, revenue and sales. Underdetermination of prices, there are several topics to choose from: 

  • Change in demand 

  • Change in supply

  • Monopoly market 

  • Oligopoly 

  • Demand Curve

  • Price Discrimination 

  • Long-Run Equilibrium

  • Monopolist’s Revenue Curve

A few more additional features of perfect competition are that buyers have no specific seller preferences and neither do sellers. Any kind of commodity that is offered to a seller is accepted. 

Solved Examples

1. What are some examples of Perfect Competition? 

Ans: In the real world, it is often difficult to find or explain the features of perfect competition. The key features of perfect competition are not fulfilled in most of the industries. However, some industries have come close to achieving the main features of perfect competition. 

  • Foreign exchange markets have homogenous currency. Traders have access to all different kinds of buyers and sellers. While buying currency, it often becomes easier to compare the price. 

  • Agricultural markets have several farmers selling the same products in the market. It is easier to compare prices in the market, and therefore the agricultural industry often gets close to getting the key features of perfect competition fulfilled. 

  • Internet industries explain the features of perfect competition in a better manner because the internet has made it easier to compare prices. Similarly, there have been barriers to entry to lower prices too. A good example here is, selling any product through online services such as eBay, Amazon or Flipkart are close to perfect competition. You can compare the prices from several brands and sites before deciding on one. 

Fun Facts about the Key Features of Perfect Competition

  • There is no information about failure or success in perfect competition. There are no barriers to entry or exit. 

  • The firms cannot derive any monopoly power. 

  • The single firm is referred to as a price taker. 

  • There are no additional advertisement costs because the firms have perfect knowledge of the products they produce. 

  • There is maximum efficiency.

  • In the long run, the equilibrium occurs at the output where there is productivity efficiency. 

  • Consumers get a maximum choice.

In general economics, this term of perfect competition can be easily defined as an equilibrium in the market. Perfect competition refers to the fact that every firm has an equal number of customers and an equal number of services. This means that no one is taking the lead in a particular market. 

Some of the Ideal Conditions of a Perfect Market

There are a set of Marketing conditions that idealize this competition. The following described points are very essential:

1. A Large Number of Sellers and Buyers

There should be an equal number of buyers and producers at a time. This would not influence price to a high amount. In simple words, if there is a large number of buyers who are willing to buy a particular product at a particular price and if a large number of sellers or producers are willing to produce a huge amount of products at a particular amount price, then prices are influenced only to a little extent.

2. Anti-Competitive Regulation

A perfect competition leads to full protection and regulations and the elimination of anti-competitive activity in the marketplace. 

3. Every Participant is a Price Taker

In a particular perfect competition, no participant acquires the market power to set market prices.

4. Homogeneous Products

The products contain the same attributes. One product is a better substitute for the other product. In simple terms, in this type of condition, the significant rise in the price of one product automatically influences the sale of the other product. They have similar structures and have the same amount of buyers. The qualities of goods and services have a close resemblance with each other. This in turn also provides a lot of options to the consumers.

5. Rational Buyers

In order to increase the economic utility, the buyers should increase the trade too.

6. No Barriers to Entry or Exit

The sunk costs( i.e, the costs that cannot be recovered) should be avoided fully. The entry and exit should be free of this particular factor.

7. No Externalities

The third parties should not get affected by the costs or benefits of any other parties. Perfect competition is also free of government intervention.

8. Non-Increasing Returns to Scale and no Network Effects

This particular condition ensures that the market will always contain a sufficient number of firms in the industry.

9. Perfect Factor Mobility

This particular condition ensures the free movement between different firms. This helps a lot in the long run. The factors of production should be mobile. This further helps in the stimulation of future changes in the market.

10. Perfect Information

The consumers and the buyers should be aware of all the prices of the goods and utilities they are producing or buying. The information should be transparent. This provides firms to obtain any information that would give rise to a competitive edge. 

11. Profit Maximization of Sellers

Firms prefer to sell the goods and services to places where they can have more profit. This implies that marginal costs meet the marginal revenue. 

12. Well Defined Property Rights

The particular condition ensures that what is more appropriate to be sold and what should be the rights that should be bestowed on the buyers.

13. Zero Transaction Costs

While making an exchange of goods, buyers or sellers do not incur costs.

These are some of the basic assumptions that feature the perfect competition. The points sum up all the instances if a perfect competition ever occurs, although a real market is never perfect and the term "close to perfect" or very imperfect is used.

FAQs on Features of Perfect Competition

1. Is Perfect Competition Realistic? 

In Classical Economics, the features of perfect competition and their implications are a theoretical market structure. Six economic factors must be met before one can claim that perfect competition has reached. A key feature of the perfect competition will produce the best possible outcomes for both producers and consumers. 

All firms sell identical products, and all of them are price takers. The market share is relatively small, and buyers always know the nature of the product being sold. As of now, all markets exist outside of the perfect competition model because it is considered to be an abstract and theoretical model. Major obstacles prevent perfect competition from occurring in the real economy. 

2. Why is Perfect Competition a Price Taker? 

A perfect competition firm is a price taker. It must accept the price at which it sells the product. This maintains a certain equilibrium. If a firm makes even tiny changes in the sale, then it will amount more than the market price. Thus it will not be able to make any product sales. 

As there are many sellers, products become similar from one seller to another. The market structure in such conditions is difficult to hold onto. A feature of perfect competition in Economics is that the competitive firm must be a small player in the wide market. The increase and decrease of the output must not affect the quantities supplied or market prices.