Perfect competition
Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.
What is the perfect competition?
All agents are price takers. No single buyer or seller can affect the price of the good. Everyone takes the price as given, and, depending on the price, decides about quantity. This condition will be true if there are many small buyers and sellers.
Homogenous products . Each seller’s products are identical to every other seller’s products. Furthermore, there are no extra costs, such as transportation costs, for some sellers. The buyers are therefore neutral between different sellers.
All factors of production are completely variable. There are no barriers to entry for new firms or barriers to leave for existing firms.
All buyers and sellers have complete information about existing alternatives in the market.
There are no agreements to collude in the market. For instance, the sellers cannot form a cartel.
Conditions for Perfect Competition
There are a large number of buyers and sellers.
Each competitor offers a homogeneous product, i.e. the products are similar to each other in terms of quality, size, design and color. Thus one product could be substituted for the other if the price is lower
There is no obstacle with regard to entry or exit of the firms.
There are many competitors (whether buyers or sellers), each acting independently
The market in which the commodity is bought and sold is well organized and trading is continuous.
All the firms have equal access to production technologies and techniques.
Main Features of Perfect Competition
There are several advantages to the existence of a perfect competition situation within a given consumer market. One has to do with the options open to customers. With a number of smaller companies offering similar products, the consumer is free to pick and choose from any of them, in order to satisfy his or her needs. This situation empowers the consumer, who does not have to make do with one or two brands of the desired product, but can try multiple products when and as desired.
An advantage of perfect competition for businesses is the ability to set their own prices, rather than establishing price structures based on the pricing offered by one or two companies that dominate the market place.
Advantages
In the real world, companies are constantly engaged in a battle, wanting to outdo their competitors. They resort to innovation, price hikes, and advertising to achieve a stronghold in the market. Some of these practices may benefit the consumers, whereas some may not. Perfect competition is an unrealistic concept, which leaves out the very core of economic development - improvement through innovation. It is an ideal which is impossible to attain in the real world, and is also unnecessary, owing to its rigid parameters.
