Question

What is perfect competition? Write the major characteristics of a perfectly competitive market.

Answer 1

The situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers. In other words it can be said—”A market is said to be perfect when all the potential buyers and sellers are promptly aware of the prices at which the transaction take place. Under such conditions the price of the commodity will tend to be equal everywhere.”

A perfectly competitive market has several important characteristics:

• All producers contribute insignificantly to the market. Their own production levels do not change the supply curve.
• All producers are price takers. They cannot influence the market. If a firm tries to raise its price consumers would buy from a competitor with a lower price instead.
• Products are homogeneous. The characteristics of a good or service do not vary between suppliers.
• Producers enter and exit the market freely.
• Both buyers and sellers have perfect information about the price, utility, quality, and production methods of products.
• There are no transaction costs. Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
• Producers earn zero economic profits in the long run.