What is Perfect Competition?Characteristics

Definition of Perfect Competition

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”.

According to Bilas defined__”The perfect competition is characterized by the presence of many firms; they all sell identically the same product. The seller is a price-taker”.

Mrs. Joan Robinson__”Perfect competition prevails when the demand for the output of each producer is perfectly elastic. This entails,first the number of sellers is large so that the output of any one seller in negligibly small proportion of the total output of the commodity,and second,that buyers are alike in respect of their choices in respect of rival sellers,so that market is perfect”.

Characteristics/ Features of Perfect Competition

Perfect competition prevails when the demand for the output of each producer is perfectly elastic. It exists when following conditions are satisfied.

1. Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole. In the market the position of a purchaser or a seller is just like a drop of water in an ocean.

2. Homogeneity of the Product:

Each firm should produce and sell a homogeneous product so that no buyer has any preference for the product of any individual seller over others. If goods will be homogeneous then price will also be uniform everywhere.

3. Free Entry and Exit of Firms:

The firm should be free to enter or leave the firm. If there is hope of profit the firm will enter in business and if there is profitability of loss, the firm will leave the business.

4. Perfect Knowledge of the Market:

Buyers and sellers must possess complete knowledge about the prices at which goods are being bought and sold and of the prices at which others are prepared to buy and sell. This will help in having uniformity in prices.

5. Perfect Mobility of the Factors of Production and Goods:

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

6. Absence of Price Control:

There should be complete openness in buying and selling of goods. Here prices are liable to change freely in response to demand and supply conditions.

7. Perfect Competition among Buyers and Sellers:

In this purchasers and sellers have got complete freedom for bargaining, no restrictions in charging more or demanding less, competition feeling must be present there.

8. Absence of Artificial Restrictions: There is freedom to the sellers to sell their goods to any buyer and buyers are free to purchase from any seller. The buyers and sellers must be free from any discrimination.

9. Absence of Selling Costs: Due to the production of homogeneous product by the firms, the cost of advertising, sales promotion,etc., is negligible under perfect competition.

Assumptions of Perfect Competition

  1. Free entry and exit of the firms.
  2. The efficiency of all the firms is same.
  3. Uniformity in the cost curves of the firms.
  4. The technology being alike, the plants of all firms are same.
  5. All the firms have perfect knowledge about price and output.