The concept of Perfect Competition was introduced by Dr. Alfred Marshall.
"Perfect Competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices."
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.
"Prefect 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".
Perfect Competition is a market structure where there is a perfect degree of competition and single price prevails.
The following are the characteristics or main features of perfect competition :-
1. Large number of firms
The basic condition of perfect competition is that there are large number of firms in an industry. Each firm in the industry is so small and its output so negligible that it exercises little influence over price of the commodity in the market. A single firm cannot influence the price of the product either by reducing or increasing its output. An individual firm takes the market price as given and adjusts its output accordingly. In a competitive market, supply and demand determine market price. The firm is price taker and output adjuster.
2. Large number of buyers
In a perfect competitive market, there are very large number of buyers of the product. If any consumer purchases more or purchases less, he is not in a position to affect the market price of the commodity. His purchase in the total output is just like a drop in the ocean. He, therefore, too like the firm, is a price taker.
In the figure, PK is the market price determined by the market forces of demand and supply. The price taker firm has to adjust and sell its output at Price PK or OE.
3. The product is homogeneous
Another provision of perfect competition is that the good produced by all the firms in the industry is identical. In the eyes, of the consumer, the product of one firm (seller) is identical to that of another seller. The buyers are indifferent as to the firms from which they purchase. In other words, the cross elasticity between the products of the firm is infinite.
4. Zero Advertisement Cost
Since all products are identical in features like quality, taste, design etc., there is no scope for product differentiation. So advertisement cost is nil.
5. Free Entry and Exit
The firms in a competitive market have complete freedom of entering into the market or leaving the industry as and when they desire. There are no legal, social or technological! barriers for the new firms (or new capital) to enter or leave the industry. Any new firm is free to start production if it so desires and stop production and leave the industry if it so wishes. The industry, thus, is characterized by freedom of entry and exit of firms.
There are no restrictions on entry and exit of firms. This feature ensures existence of normal profit in perfect competition. When profit is more, new firms enter the market and this leads to competition. Entry of new firms competing with each other results into increase in supply and fall in price. So, this reduces profit from abnormal to normal level.
When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So remaining firms raise their prices and their profits go up. So again this ensures normal level of profit.
6. Complete information
Another condition for perfect competition is that the consumers and producers possess perfect information about the prevailing price of the product in the market. The consumers know the ruling price, the producers know costs, the workers know about wage rates and so on. In brief, the consumers, the resource owners have perfect knowledge about the current price of the product in the market. A firm, therefore, cannot charge higher price than that ruling in the market. If it does so, its goods will remain unsold as buyers will shift to some other seller.
7. Profit maximization
For perfect competition to exist, the sole objective of the firm must be to get maximum profit.
8. Perfect Mobility of Factors
This feature is essential to keep supply at par with demand. If all factors are easily mobile (moveable) from one line of production to another, then it becomes easy to adjust supply as per demand.
Whenever demand is more additional factors should be moved into industry to increase supply and vice versa. In this way, with the help of stable demand and supply, we can maintain single price in the Market.
9. No Government Intervention
Since market has been controlled by the forces of demand and supply, there is no government intervention in the form of taxes, subsidies, licensing policy, control over the supply of raw materials, etc.
10. No Transport Cost
It is assumed that buyers and sellers are close to market, so there is no transport cost. This ensures existence of single price in market.
Views of Perfect Competition :-
Economists often favor perfect competition for the following reasons:
Disadvantages of Perfect Competition :-
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.
"Prefect 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".
Perfect Competition is a market structure where there is a perfect degree of competition and single price prevails.
The following are the characteristics or main features of perfect competition :-
1. Large number of firms
The basic condition of perfect competition is that there are large number of firms in an industry. Each firm in the industry is so small and its output so negligible that it exercises little influence over price of the commodity in the market. A single firm cannot influence the price of the product either by reducing or increasing its output. An individual firm takes the market price as given and adjusts its output accordingly. In a competitive market, supply and demand determine market price. The firm is price taker and output adjuster.2. Large number of buyers
In a perfect competitive market, there are very large number of buyers of the product. If any consumer purchases more or purchases less, he is not in a position to affect the market price of the commodity. His purchase in the total output is just like a drop in the ocean. He, therefore, too like the firm, is a price taker.
3. The product is homogeneous
Another provision of perfect competition is that the good produced by all the firms in the industry is identical. In the eyes, of the consumer, the product of one firm (seller) is identical to that of another seller. The buyers are indifferent as to the firms from which they purchase. In other words, the cross elasticity between the products of the firm is infinite.
4. Zero Advertisement Cost
Since all products are identical in features like quality, taste, design etc., there is no scope for product differentiation. So advertisement cost is nil.
5. Free Entry and Exit
The firms in a competitive market have complete freedom of entering into the market or leaving the industry as and when they desire. There are no legal, social or technological! barriers for the new firms (or new capital) to enter or leave the industry. Any new firm is free to start production if it so desires and stop production and leave the industry if it so wishes. The industry, thus, is characterized by freedom of entry and exit of firms.
There are no restrictions on entry and exit of firms. This feature ensures existence of normal profit in perfect competition. When profit is more, new firms enter the market and this leads to competition. Entry of new firms competing with each other results into increase in supply and fall in price. So, this reduces profit from abnormal to normal level.
When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So remaining firms raise their prices and their profits go up. So again this ensures normal level of profit.
6. Complete information
Another condition for perfect competition is that the consumers and producers possess perfect information about the prevailing price of the product in the market. The consumers know the ruling price, the producers know costs, the workers know about wage rates and so on. In brief, the consumers, the resource owners have perfect knowledge about the current price of the product in the market. A firm, therefore, cannot charge higher price than that ruling in the market. If it does so, its goods will remain unsold as buyers will shift to some other seller.
7. Profit maximization
For perfect competition to exist, the sole objective of the firm must be to get maximum profit.
8. Perfect Mobility of Factors
This feature is essential to keep supply at par with demand. If all factors are easily mobile (moveable) from one line of production to another, then it becomes easy to adjust supply as per demand.
Whenever demand is more additional factors should be moved into industry to increase supply and vice versa. In this way, with the help of stable demand and supply, we can maintain single price in the Market.
9. No Government Intervention
Since market has been controlled by the forces of demand and supply, there is no government intervention in the form of taxes, subsidies, licensing policy, control over the supply of raw materials, etc.
10. No Transport Cost
It is assumed that buyers and sellers are close to market, so there is no transport cost. This ensures existence of single price in market.
Views of Perfect Competition :-
Economists often favor perfect competition for the following reasons:
- It ensure the elimination of abnormal profit.
- It promotes the efficient use of resources.
- There is a tendency to encourage producers to reduce average costs as much as possible. This is equivalent to making the most efficient use of resources.
Importance of Perfect Competition :-
Perfect competition model is hotly debated in economic literature. It is argued that the model is based on unrealistic assumptions. It is rare in practice. The defenders of the model argue that the theory of perfect competition has positive aspect and leads us to correct conclusions. The concept is useful in the analysis of international trade and in the allocation of resources. It also makes us understand as to how a firm adjusts its output in a competitive world.
Disadvantages of Perfect Competition :-
- It prevents producers from making the profit necessary to provide funds for investment and research, to find better ways of producing goods.
- Competition can be wasteful, as the resources of each of the competitors are doing the same things. If there were fewer competing firm, total costs could be reduced and some resources freed to produce something else.
- Firms dislike perfect competition because there is no price stability since prices follow changes in demand and supply.
- For manufactures, swiftly moving prices are untenable. They can survive in such a market only if they could keep changing the prices paid for production factors, including the wages paid to workers. Producers want stable - or, preferably, rising - prices.
- From a social standpoint, perfect competition is far from ideal. Perfect competition, which economists perceive to be in the consumer interest, cannot exist together with stable wages and secure employment conditions.
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