State and explain a few features about perfect competition.
State and explain a few features about perfect competition.
Following are the three main features of perfect competition :
(i) Large number of buyers and sellers
(ii) Homogenous goods
(iii) Free entry and exit of firms
Let us discuss these features in detail :
(i) Large number of buyers and sellers: The first important feature of perfect competition is that there is a very large number of buyers and sellers. The number of sellers is so large that an individual seller produces a small portion of the total output of the market. Thus no individual seller can influence price in the market. Similarly, the number of buyers is so large that an individual buyer purchases an insignificant portion of the total output in the market. As such, no individual buyer can influence the price in the market. Thus, under perfect competition, no individual seller or individual buyer can affect the price of the commodity.
(ii) Homogenous products: The second feature of perfect competition is that the goods sold by different sellers (firms) are homogenous or identical in every respect like quality, size, design, colour etc. The products are perfect substitutes of one another. All buyers pay the same price for the products of all sellers. No seller can charge a higher price (or different price) of the product it sells or else he will lose his customers. A uniform price prevails in the market.
(iii) Free entry and exit of firms: The main feature of perfect competition is that new firms are free to enter and existing firms can leave the market at any time they wish to. This ensures that there are neither abnormal profits nor losses by any firm in the long run. If the firms are making abnormal profits, new firms enter and raise the total supply in the industry. This reduces the market price and wipes out profits. In case the firms are incurring losses, some existing inefficient firms will leave the industry and reduce the total supply. This raises the price till the losses are wiped out.
Following are the three main features of perfect competition :
(i) Large number of buyers and sellers
(ii) Homogenous goods
(iii) Free entry and exit of firms
Let us discuss these features in detail :
(i) Large number of buyers and sellers: The first important feature of perfect competition is that there is a very large number of buyers and sellers. The number of sellers is so large that an individual seller produces a small portion of the total output of the market. Thus no individual seller can influence price in the market. Similarly, the number of buyers is so large that an individual buyer purchases an insignificant portion of the total output in the market. As such, no individual buyer can influence the price in the market. Thus, under perfect competition, no individual seller or individual buyer can affect the price of the commodity.
(ii) Homogenous products: The second feature of perfect competition is that the goods sold by different sellers (firms) are homogenous or identical in every respect like quality, size, design, colour etc. The products are perfect substitutes of one another. All buyers pay the same price for the products of all sellers. No seller can charge a higher price (or different price) of the product it sells or else he will lose his customers. A uniform price prevails in the market.
(iii) Free entry and exit of firms: The main feature of perfect competition is that new firms are free to enter and existing firms can leave the market at any time they wish to. This ensures that there are neither abnormal profits nor losses by any firm in the long run. If the firms are making abnormal profits, new firms enter and raise the total supply in the industry. This reduces the market price and wipes out profits. In case the firms are incurring losses, some existing inefficient firms will leave the industry and reduce the total supply. This raises the price till the losses are wiped out.
