Perfect Competition – Explanation & Features

We have briefly explained it in our “Market – Concept & Types A Brief Introduction” post, but for those who missed that, here is the complete details of the topic.

According to Boulding—”A Perfect Competition market may be defined as a large number of buyers and sellers all engaged in the purchase and sale of identically similar commodities, who are in close contact with one another and who buy and sell freely among themselves.” But, just in case, for those who haven’t read that, Here we will discuss this in details.

According to Mrs. Joan Robinson —”Perfect Competition prevails when the demand for the output of each producer is perfectly elastic.”

A Perfect Competition market is that market in which there is a number of buyers and sellers, all are engaged in buying and selling a homogeneous product, and individual buyer or seller has any control over its price and the price is determined by the forces of market supply and market demand.

Features of Perfect Competition

1. Large Number of Buyers and Sellers of a Product

The number of buyers are so large that the demand of an individual buyer is only a small fraction of the market demand and the number of sellers are so large that supply of an individual seller is only a small fraction of the market supply. So the demand and supply remains unaffected.

Because of this the Demand Curve of becomes a Horizontal Straight Line.

2. Selling Homogeneous Product means No Product Differentiation

Under Perfect Competition each firm sells a Homogeneous product.

A product is Homogeneous when each unit of it is identical in shape, size, colour, weight and in every way or manner.

3. No Control over Price

When the product is homogeneous, a firm has no control over price, just a little bit increase in price will shift its buyers to other firms identical product.

4. No Advertising Cost

When there is identical or Homogeneous products, there is no need to do advertising.

5. Uniform Price of the Product

Because the products are Homogeneous and  firm’s have no control over its price, the price of the products is decided by the market forces of supply and demand, So there is Uniform price in all over the market.

 Perfectly Elastic Demand (Ed = infinite) shows firm has no control over price.

 Slope of Demand Curve is Horizontal Straight Line (AR = MR), a firm can sell any quantity of its product at the prevailing market price.

6. Freedom of Entry and Exit

Any new firm can enter in the industry and any old firm can exit from the industry. There are no restrictions or barriers to it.

7. Perfect Knowledge

This is also a feature of perfect competition, buyers and sellers have the complete knowledge that the products are homogeneous and other important information related to price, quality etc.

8. Perfect Mobility of Factors Of Production

In perfect competition, factors of production are perfectly mobile, factors of production can be shifted easily

9. No Transportation Cost

Buying a product from one seller or the other doesn’t involve any extra transportation cost. This means no producer or seller is able to charge higher price for the product. There is only one price in the market.

10. Independent Decision Making

There is no agreement between any firms regarding quality or price.

 Under Perfect Competition there is Maximum Output and Minimum Cost.

11. Firms under Perfect Competition Earns Normal Profits in the Long Run (AR=MR)

This is due to the fact that there is freedom of entry and exit. In times of extra normal profits, new firms will enter in the industry, which will increase the supply and decrease the price, extra normal profits will be gone in such case. In times of extra normal losses, some firms will leave the industry, which will cause fall in supply and increase in price, extra normal losses will be gone in this type of cases.