Perfect Competition

The concept of perfect competition can serve as a useful benchmark to measure real life against imperfectly competitive markets. Perfect competition is a theoretical market structure. It is primarily used as a benchmark (good example) against which other market structures are compared. Industry that best reflects perfect competition in real life is in the agricultural industry, in this way perfect competition market does exist practically but some say it is illusionary market.

Definitions of perfect competition

— In the words of Leftwitch,' 'Perfect competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price."

— In the words of Ferguson, "Perfect competition describes a market in which there is complete absence of direct competition among economic groups."

— In the words of Prof. Lim Chong Yah,' Perfect competition is a market situation where there is a large number of sellers and buyers, a homogeneous product, free entry of firms into the industry, perfect knowledge among buyers and sellers of existing market conditions and free mobility of factors of production among alternative uses."

Features of perfect competition market for its existence

Assuming the egg, honey & milk (but petrol / diesel are exempted as examples for this case as they are influence the total economy and international markets) are the products as best examples in this market condition. Read the following characteristics of this market. One can understand easily about perfect competition

1. There will be large number of sellers (producers) for one product. Eg: barely can we see this market situation in the commodities of natural resources. Best example is egg

2. Large number of buyers in the market.

3. Existence of single price for a commodity in the entire market. All the sellers sell the product at the same price. There will not be different prices for goods from different seller as they all produce same product under perfect competition.

4. The commodity is homogeneous. Where the price, quality and quantity of products will be same. Buyer need not buy a commodity at a particular seller, because it will have same price, quantity and quality all over, under perfect competition.

5. In perfect competition buyers have perfect knowledge about price as they knew it from the other sellers of the similar product.

6. If any seller reduces the price, other seller remains silent until his production is over. Thereafter again the remaining sellers sell at market price.

7. There is no need to seller to reduce the price of product, because there is no competition between the sellers as they all sell similar product in perfect competition.

8. There must be free entry and free exit in the market for the firms. New firms can join and old firms can leave the market in perfect competition.

9. There will be no extra selling cost. As the product is homogenous (same price, quality and quantity) there is no need for any publicity like advertisement.

10. There will be very less distribution cost, as sellers are in large number for the same product.

Determination of price under perfect competition

Responses to a change in demand or to a change in supply may be primarily in price or primarily in quantity. If the demand is highly elastic, consumers will respond readily to price changes by dropping out of the market when prices are raised a little and by coming in and increasing purchases when prices are lowered a little. As a result, most of the adjustments to changes in supply (an increase leading to a reduction in price and a decrease leading to an increase in price) will be adjustments in quantity purchased if the demand is highly elastic. If the demand is inelastic, the adjustments will take place primarily in price, Similarly, if sellers respond readily by greatly increasing their offerings on slight increases in price, or by heavy withdrawals on slight price drops, the adjustments to changes in demand will be largely in quantity exchanged. If sellers are quite unresponsive to price in their offerings (if supply is very inelastic), the adjustments to changes in demand will take place largely through shifts in price.

Perfect Competition.pptx