Definition

Perfect Competition

What is Perfect Competition?

Perfect competition refers to a market structure where competition is level is very high because of the presence of many sellers who sells homogeneous product. The price of products or services are determined by the equilibrium depending on the demand and supply of products in the market. In a perfect competition market, both the sellers and buyers are price-takers, and the market price of products is not affected by an individual buyer and seller.  

Summary
  • Perfect competition refers to a market structure where competition is very high because of the presence of many sellers who sells homogeneous product.
  • The price of products or services are determined by the equilibrium depending on the demand and supply of products in the market.
  • Both the sellers and buyers are price-takers, and the market price of products is not affected by an individual buyer and seller.

 

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Understanding Perfect Competition

Perfect competition defines a hypothetical market where competition level between the buyers and seller is at its best. A perfect competition market is a place where there are many producers and consumers in the market engaged in selling identical product and the price of the products is decided by the equilibrium between the buyer’s demand of the product and the producer’s supply of the product. A market is said to be perfect competition market if it meets the following given criteria including all the producers sells homogeneous products, all the firms (buyers and sellers) are the price takers, buyers have perfect knowledge about the past present future charged prices of the products, any firm can enter and exit freely without any restrictions.

Perfect competition is considered as a benchmark for the comparison of real-life market structures. Theoretically, we can say that perfect competition is just opposite of a monopoly market. In monopoly market, a single producer is the only supplier of products or services in the market and can charge any price as buyers have no option, and the producer is the price maker. It is very difficult for a producer to enter a monopoly market. In perfect competition, producers generate sufficient profit to stay in the business and nothing more because they are many other producers would take entry in the market and drive profits fall.

Frequently Asked Questions (FAQs)

What are the features of Perfect Competition?

There are several features or characteristics of perfect competition are as follows:

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  • No individual producer takes a major market share: One of the main characteristic of a perfect completion market is no individual firm can have a large market share. There are many producers in the perfect completion market and have the market share accordingly. Market share refers to the proportion of the total output of an industry belongs to one producer only. In perfect competition, each firm of the market earns normal profit.
  • Products should be Homogeneous: In perfect competition market, the producers have to supply Homogeneous or identical products to the consumers. In perfect competition market, buyers have alternatives or their needed or desired product.
  • Freedom of entry and exit: Under perfect competition, producers are allowed to enter and exit easily. If a new producer arrives in the industry is called as a market entry and if a producer left an industry that it is referred as market exit. There is no restriction imposed by the government in the entry or exit in the industry under perfect competition.
  • Large number of buyers and sellers: There are a large number of producers and consumers in the perfect competition. In perfect competition, consumers have alternatives for every product and service due to the availability of large number of sellers of the identical products.
  • Zero advertising cost and transportation costs: One of the features of perfect competition is that there is no/zero advertising and transportation and there is no government intervention.
  • All the buyers and sellers are price taker: In perfect competition, all the producers and the consumers are the price taker, no individual can influence the price of a product or service. Because the price of products and services is determined by the demand and supply for of the market.
  • Buyers have full information: In perfect competition, consumers and buyers have perfect information or knowledge about the market including the past and present prices of a product or services charged by every firm.
  • Factors mobility: In perfect competition, factors of production should have mobility and not obstruct by any force or factor of market. Factors or production may include labour, capital etc.

What are the advantages of Perfect Competition?

Advantages of perfect competition include:

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  1. Low chances of consumers exploitation

The first and major advantage of perfect competition is that there are low chances of a buyer’s exploitation because the prices of the products or services are determined by the demand and supply. Unlike monopoly, producers do not have monopoly right to the prices of products or services and cannot influence the price of a product or service.

  1. Standardised product

Standardised product is another advantage of the perfect competition. In perfect competition, a buyer can get standardised (homogeneous) product regardless from which place he/she purchases the product.

  1. Focus on consumer

In perfect competition, the main focus is on consumer because the market is the consumer oriented. If a seller cannot satisfy the consumer, the consumer will shift to another seller quickly. Perfect competition is the consumer concerned market.

  1. No advertisement expenses

One of the advantages of perfect competition is that advertisement expense is zero. As the products are homogeneous in perfect competition, so the sales happens automatically based on the prices of market forces.

What are the disadvantages of Perfect Competition?

Disadvantages of perfect competition may include the following:

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  • No incentive for sellers: One of the biggest disadvantages of perfect competition is that there is no incentive for producers for the innovation or adding new features to the product because the producer cannot charge more than the equilibrium price between the demand and supply of the product. If the producer asks more than the normal price the consumer immediately will shift to another producer.
  • Firms earn normal profit: In perfect competition, every firm earns normal profit not super profit because of the fixed profit margin.
  • A firm’s location: A form’s location is also a disadvantage of perfect competition. A firm with prime location may generate more sales in the comparison of others.