Posted in Finance, Accounting and Economics Terms, Total Reads: 456
Definition: Pure Competition
A perfect competition in a market place is said to be present when all firms sell identical product, there are no entry and exit barriers to firms, the prices of the products are determined by the forces of supply and demand and no firm is a price maker but are price takers. Usually in a pure or a perfect competition all firms have a small market share individually. An example of pure competition is that of firms selling soaps, pens, chocolates or other such things in the market. In these cases, the demand for these product and supply of these products usually rule the price.
Under a perfect competition, the firms are not able to dictate prices. A perfect competition is opposite of a monopoly where a single firm decides the supply of the products and dictates the price for it. A perfect competition is ideal as the price of the products is determined by its demand and the firm’s ability to supply. It tells the true value of the product in the market.
The following shows the curve for demand and supply:
There are various factors which determine the equilibrium price. If there is a change in technology the supply curve can shift to the right or left. Likewise there are several factors which can shift the demand and supply curves and then a new equilibrium price will be formed.
However, in real world a perfect competition differs. The assumption that firms make identical products does not hold true. Every firm tries to differentiate its products some way or the other. They try to gain a market share by advertising, promotions and other marketing efforts. In the real world the price and quantity fluctuates near the equilibrium and is not stable.