Perfect Competition

Posted in Marketing and Strategy Terms, Total Reads: 414
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Definition: Perfect Competition

Perfect competition describes the kind of hypothetical market where the competition existing in the market is at the highest possible level and also the following characteristics are prevalent in the market;

• There are large number of buyers and sellers present in the market

• The products produced by the firms in the market are homogenous and also substitutes for products are available

• The buyers and sellers present in the market are too small to have any control over prices of the products

• All sellers and buyers try to maximize their income and profit

• At any point of time any buyer or seller can enter or leave the market as the barriers to entry are very low. Because of this firms cannot derive monopoly in this kind of market

• The consumers of the market have perfect knowledge about the market and are aware of the changes taking place in the market. The information can be about quality, prices or availability of the products. Because of this knowledge the consumers can take rational and informed decisions

• There is no advertising cost in this market

• The factors influencing the production like capital and labour have perfect mobility, thus can flow freely and are not hindered by the market forces present in the market

• There is no government intervention in the form of new policies or regulations affecting the market forces and factors of production. But government can take actions to make market more competitive in nature

• The transportation cost is also assumed zero in this market

• The prices of products in the market are determined by demand and supply

• Each factor in production like labour is also assumed to be homogenous

• Under perfect competition, in short term firms can make super-normal profits but in the long term the profits are normal because of no barriers to entry and access to information among consumers about the market

 

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