Perfect Competition: Definition, Characteristics, and Examples

Perfect Competition: Meaning and Definition

A perfectly competitive market is one with a large number of buyers and sellers, all trading a homogeneous product without artificial restrictions, and possessing complete market knowledge.

In other words, a market is considered perfect when all potential buyers and sellers are immediately aware of transaction prices. Under these conditions, the price of the commodity tends to equalize across the market.

As Mrs. Joan Robinson stated, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."

According to Boulding, "A perfectly competitive 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."

Characteristics of Perfect Competition

The following characteristics are essential for perfect competition:

1. Large Number of Buyers and Sellers

The number of buyers and sellers must be so large that no single entity can influence the price and output of the industry. Each participant is like a drop in the ocean.

2. Homogeneity of the Product

Each firm must produce and sell a homogeneous product, ensuring no buyer prefers one seller's product over another. Homogeneous goods lead to uniform prices.

3. Free Entry and Exit of Firms

Firms should be free to enter or exit the market. The prospect of profit attracts new entrants, while losses drive firms to leave.

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4. Perfect Knowledge of the Market

Buyers and sellers must have complete knowledge of prices at which goods are bought and sold. This ensures price uniformity.

5. Perfect Mobility of Factors of Production and Goods

There should be perfect mobility of goods and factors between industries. Goods should move freely to where they fetch the highest price.

6. Absence of Price Control

Buying and selling should be completely open. Prices should change freely in response to supply and demand.

7. Perfect Competition Among Buyers and Sellers

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Purchasers and sellers should have complete freedom for bargaining, without restrictions on pricing. A competitive spirit must prevail.

8. Absence of Transport Cost

Minimal or negligible transport costs help maintain price uniformity across the market.

9. One Price of the Commodity

A single prevailing price for the commodity exists in the market.

10. Independent Relationship Between Buyers and Sellers

There should be no preferential treatment between sellers and purchasers. Sellers should not discriminate in accepting commodity prices. In reality, perfect competition is largely a theoretical concept.