Perfect Competition is a market situation in which large number of buyers and sellers are gathered, and they deal in similar products. The buyers and sellers have full knowledge of the market, and firms are free to enter or exit.
According to Marshall ” The more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market.”
Perfect competition has the following characteristics:
- Large number of buyers and sellers – There are a large number of buyers and sellers and hence no single buyer or seller can influence the price. The price is determined by the collective effect of the market.
- Homogeneous Product – All the products are having product which are similar. So no firm can charge more. Ferratum has some homogeneous loan products for you.
- Free Entry and Exit – All the firms are free to join and leave the market. There is no entry or exit restrictions.
- Perfect knowledge of market – All the concerned players (Buyers and Sellers) have all the information about the market. Hence advertising will have no effect.
- Perfectly mobile factors of production – The factors of production are perfectly mobile, and are free to move to any industry.
- Independence in decision-making – All the buyers and sellers are independent to make their own decisions. The price remains equal and the buyers and sellers have to make the choice when to buy.
- No Selling or Transportation cost – One of the main assumptions is the absence of selling or transportation cost. Even if there are costs involved it plays no role in price determination.
Perfect competition is an ideal situation and very rarely exists practically. However understanding the concept is central to understanding other kinds of market structures.
Economics for Beginners 