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Perfect competition can be defined as a marketplace in which buyers and sellers are capable of working freely and can sell at a constant price. In other words, it can be said that perfect competition is the type of market structure that has a large number of buyers along with a large number of sellers.
Definition of perfect competition
A market in which there are many buyers and sellers, the products are homogeneous and can easily enter and exit from the market.
Features of perfect competition
The main features of perfect competition are as below:
Many buyers and sellers
There is a huge number of buyers and sellers in the perfect competition. The advantage of having a large number of small-scale producers is that they do not combine in order to influence the market price. If the quantity sold by an individual seller is less in comparison to the total market produce, one seller cannot influence the price of the market independently.
Similarly, if there are several buyers in the marketplace, then the individual will not have the power to change conditions of the market or create a new price by enhancing the demand of the product. However, individual demand will not be large enough to change individual prices.
Homogeneity
The product or services produced by sellers in the competitive market is homogeneous in all ways. There should be no differentiation between homogeneous products on the basis of all the aspects.
There should be no difference between the products on the basis of quantity, size and taste. This is to ensure that the product is perfect – this means that if the producer has a high price for the commodity, then he/she will end up losing customers.
Free entry and exit
One of the most essential conditions of the perfect competitive market is that there should be no restrictions on entries of new firms. The decision to stay or leave the market depends upon economic factors only. In other words, it can be said that there are no artificial restrictions on the company to enter or leave the market.
Perfect knowledge
Buyers and sellers should have perfect knowledge regarding the market conditions. Buyers must be aware of the products being sold to them at particular prices. At the same time, sellers must know about their target market in order to increase potential sales at several price points.
As consumers already know about the product, it does not involve any type of advertising or sales promotion. Therefore, the firm need not invest in these types of activities. It allows sellers to save money that can be spent on marketing activities. This somehow leads to reduction in prices of the products.
Mobility of the factors of production
Several factors of production like labour, raw material and capital must have total mobility under the perfect competitive market. The labour has freedom to move from one industry or one market to the other on the basis of higher remuneration.
Even the raw materials and capital do not present any restrictions on the movement.
Cost of transportation
We know that the cost of transportation is classified into inward transportation cost and outward transportation costs, materials /goods received at a factory or place of use or sale/removal, goods from one place to another place, further transportation for delivery to customer or storage.
It is assumed that transportation costs are similar for all of them. At the end, it can be said that the overall cause of production is similar for all producers across the board.
Absence of artificial instruction
There is no interference from the government or a regulatory body to affect the functioning of perfect competition. Usually, there are no controls or restrictions regarding the supply of goods and their pricing. That means prices can change depending upon the demand and supply conditions.
Uniform price
All products and services in the perfect competitive market have uniform prices. This price is determined by the forces of demand and supply.
Conclusion
A perfect competitive market functions very smoothly. Several buyers and sellers work together in total harmony. Producers and sellers in the perfect competitive market must try to attain the fair price for the products provided by them.
