Perfect Competition | Commercial Applications - Class 6 PDF Download

Perfect Competition

Like any other market structure, Perfect Competition is defined on the basis of its features. Perfect Competition is a market structure in which there is a large number of buyers and sellers who transact homogeneous or similar goods at a price fixed by the market or industry. Here, industry is a group of firms producing similar goods.

Features of Perfect Competition: Perfect Competition is characterized by:

• Very Large number of buyers and sellers: In a perfectly competitive market, there is a very large number of buyers and sellers. For instance, if a single seller tries to raise the price, there is a large number of other sellers selling identical product at a lower price. Therefore, the demand for this particular firm decreases forcing it to come in line again with the industry determined price. 
• Homogeneous Product: The products offered by different firms are homogeneous in every respect so that the buyer does not have any basis to prefer the goods of one seller over the goods of another seller. The goods are identical in terms of quality, size, packing, and other terms of deal etc. This feature ensures the uniformity of the price throughout the market. 
• Firm is a Price Taker: The firm has to sell the goods at a price determined by the industry as the firm has no control over the price. The market or industry determines this price on the basis of market demand and market supply as shown in the figure. So industry is the price maker and firm is the price taker. 
• Free Entry and Exit: Under perfect competition firms are free to enter into the market or exit from the market at any point of time. This means that there is no obstruction from any where for a new firm to produce the same product produced by the existing firms in the market; similarly if a firm wishes to exit then it is free to do so. 
• Perfect Knowledge: This feature implies that both sellers and buyers have perfect knowledge about the goods and their prices so that it is not possible for a firm to charge a different price. It also ensures uniform price for the buyers and uniform cost function for the producers. 
• Perfect Mobility: The goods as well as the factors of production are perfectly mobile so that there is no restriction- legal or monetary (involving expenditure in movement of goods). This feature ensures that the price throughout the market tends to be uniform. 
• No Selling Costs: Selling costs are the costs aimed at promotion of sales of product of a firm, e.g. expenditure on advertisement of a product. In perfect competition, there is no need to incur selling cost because of assumption of perfect knowledge and homogeneous goods. This implies that if people have Determination complete knowledge about the product, the seller does not find it necessary to educate consumers through advertisements. Similarly, when goods are homogeneous, there is no basis on which the seller can claim superiority of his products over the products of its rivals.
• 8. Shape of Demand Curve: Under perfect competition, the demand curve for the firm is horizontal and perfectly elastic. It means that the firm can sell any amount of the product at the price determined by the industry, but the firm cannot vary the price.