Perfect Competition Meaning, Features, Assumption and Limitations

Features of Perfect Competition
Micro Economics Notes

Perfect Competition Meaning

Perfect Competition is a form of market in which there is a large number of buyers and sellers. They sell homogeneous goods. Firm produces only a small portion of the total output produced by the whole industry.

An industry is a group of different firms producing the same product. A single firm cannot affect the price by its individual efforts. Price is fixed by the industry. Firm is only a price taker and not a price-maker. It can sell the desired output only at the price-fixed by the industry. In such a market, price of the commodity is the same at every place.

There is also free entry and exit of the firms. Both the buyers and sellers have perfect information about the prevailing price in the market. Thus perfect competition is the name given to a market in which buyers and sellers compete with one another in the purchase and sale of a commodity.

No one of them has any individual influence over the price of the commodity.

According to Bilas,

“The perfect competition is characterized by the presence of many firms: they all sell identically same product. The seller is a price taker.” Ferguson said, “Perfect competition describes a market in which there is a complete absence of direct competition among economic groups.”

Features or Assumptions of Perfect Competition

Different definitions given by different economists point out the distinct features of perfect competition. We can list various features which point out that the form of a market is perfectly competitive. In other words, there are some necessary conditions which must be satisfied if the market is to be perfectly competitive. Perfect competition is characterized by:

1. Large number of small, unorganized firms:

The first condition which a perfectly competitive market must satisfy is concerned with the seller’s side of the market. The market must have such a large number of sellers that on one seller is able to dominate in the market. No single firms can influence the price of the commodity. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market.

2. A large number of small, unorganized buyers:

On the buyer’s side the perfectly competitive market must also satisfy this condition. There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further the buyers should not have any king of union or organization so that they compete for the market demand on an individual basis.

3. Homogeneous products:

Another pre-requisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, variety, colour, design, packing or other selling conditions of the product.

4. Free entry and free exit for firms:

Under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want to leave it. This condition must be satisfied especially for long period equilibrium of the industry.

5. Perfect knowledge among buyers and sellers about market conditions:

Another pre-requisite of perfect competition is that both buyers and sellers must be having perfect knowledge about the conditions in which they are operating. Seller must know the prices being quoted or charged by other sellers in the market from the buyers. Similarly buyers must know the prices being charged by different sellers.

6. Perfect mobility:

Another feature of perfect competition is that goods and services as well as resources are perfectly mobile between firms. Factors of production can freely move from one occupation to another and from one place to another. There is no barrier on their movement. No one has monopoly or control over the factors of production. Goods can be sold to a place where their prices are the highest. There should not be any kind of limitation on the mobility of resources.

7. Absence of transport cost:

Another feature of perfect competition is that all the firms have equal access to the market. Price of the product is not affected by the cost of transportation of goods. In other words, we can say that the market price charged by different sellers does not differ due to location of different sellers in the market. Thus, there is complete absence of transport cost of the product from one part of the market to other.

8. Absence of selling cost:

Under conditions of perfect competition, there is no need of selling costs. We know that under perfect competition, goods are completely homogeneous. Price of the product is also the same for a single product. Firms have no control over the price of the product. When they cannot change the price and when their goods are completely similar, firms need not make any expenditure on publicity and advertisement.

Limitations of Perfect Competition

1. Perfect competition is a ‘Theoretical Model’.

The nearest example that we can cite is some agricultural commodities where producers (farmers) and consumers are large number. Many commodities such as wheat, rice are standardized. At present, company shares of a given business firm which are identical, with its large number of buyers and sellers, with full information available thought electronic media, can be another approximate example. Otherwise perfect competition market is more a theoretical model than a practical one.

2. Unrealistic Assumptions:

All the assumptions on which a perfect competition market is based on are unrealistic ones. Even if we take a village or a local market, still many assumptions remain impractical. Equilibrium production is decided at a point where MC = MR. In reality most of the business people are unaware of this rule, and if they aware they either do not or cannot apply.

3. Limited choice to consumers

Since, firms under perfect competition deal in homogenous product. Therefore there are limited choices to consumers

4. No benefit of large scale production

Since the number of firms under perfect competition are very large. Therefore no firm can enjoy the benefit of large scale production.

5. No incentive for the firms for innovative idea

Under perfect competition, firms are not willing to add additional features to the product because profit margin is normally fixed under perfect competition and firms cannot charge higher prices.

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