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Perfect competition Market

As the name itself suggests perfect competition refers to the market situation where the competition among the buyers and sellers will be in the most perfect form. As a market situation it is quite distinct from other types and exhibits certain distinct peculiarities of its own. One thing that government has to note that perfect competition market situation is only a theoretical concept and it is not found practically anywhere in the world. It is only a myth.
The important characteristics of perfect competition may be listed out as follows:

Large number of buyers and sellers

This is an important characteristic of perfect competition. Since there are large number of buyers and sellers in the market, each buyer buys so little and each seller sells so little that none of them are in a position to influence the price in the market. Individual seller or buyer’s contribution to the total demand or supply is negligible. Both have to sell and buy the goods at the prevailing prices.
Hence in the perfect competition price is determined by the combined actions of all the buyers and sellers in the market.

Existence of homogeneous product

This characteristic implies that the product being sold by all the sellers in the market are identical from the buyers point of view. The products are homogeneous / identical in the sense that they are perfect substitutes. Hence no seller can charge a price even slightly above the ruling market price. If he does so, he will lose all his customers. This condition ensures a single / uniform price for a particular product throughout the market.

Free entry and free exit of firms

This characteristic implies that there should be absolute freedom for the firms either to enter or to exit. If the industry is making super normal profit then new firms will enter and on the other hand few firms will quit the industry if there are losses. Hence in the perfect competition, firms can enjoy only normal profit in the long run.

Perfect knowledge of the market

All the sellers and buyers have the perfect knowledge of the market. The buyers and the sellers are fully aware of the prices that are being offered and accepted in different parts of the market. Hence there is no necessity of incurring any expenditure on publicity or advertisement. This condition ensures a single uniform price throughout the market.

Perfect mobility of the factors of production

Perfect competition implies perfect mobility of the factors of production in between places and employment, which they consider profitable and highly remunerative. This perfect mobility ensures uniform cost of production, which in turn ensures a single uniform price throughout the market.

Absence of transport costs

This condition becomes very essential in order to have a single uniform price. A single uniform price cannot exist under perfect competition, if transport costs are taken into account.
Sometimes a distinction is observed between pure competition and perfect competition. The American economists are particularly fond of using the term ‘Pure competition’. Many British economists prefer to use the term ‘Perfect competition’. However the term pure competition is used in a narrow sense. The fulfilment of the first three conditions stated above ensures pure competition, where as for perfect competition all the six characteristics stated above need to be fulfilled.

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