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FEATURES OF PERFECT COMPETITION
Perfect competition is a state of a market. Anything which facilitates contact between buyers and sellers constitutes a market. It may be a face to face meeting at some place or simply verbal negotiations through telephone, internet, etc.
Conventionally, in microeconmoics the markets are classified into these states: perfect competiton, monopoly, monopolistic competition and oligopoly. There are many criteria of classification, the number of sellers, similarity of products, availability of information, mobility of firms and the inputs engaged in the firm, etc. Whatever the criteria the end result is reflected in one thing : how much influence an individual seller, on his own, is able to exercise on the market. Lower the influence more the competitive nature of the market it indicates. If the influence of an individual seller is zero, or virtually zero, the market is said to be perfectly competitive.
Perfect competition can be defined either in terms of its characteristic features, or in terms of the unique end result of these characteristics. Unique in the sense that it is specific to a perfectly competitive market. In terms of its features, a perfectly competitive is a market where there are large number of buyers and sellers, the firms produce homogeneous products, the buyers and sellers have perfect knowledge and the firm are free to entry or make an exit in and out of industry. In terms of the end result of these features which is unique to this market, a perfectly competitive market is one in which an individual firm cannot influence the prevailing market price of the product on its own.
Features and their implications
A perfectly competitive market has the following features:
1. Large number of sellers and buyers Note that 'large number' is not a specifically defined number. However, it has a specific implication. Let us talk about the large number of sellers first. The words 'large number' imply that the number of sellers is large enough to render a single seller's share in total market supply of the product insignificant. It has a further implication. Insignificant share means that if only one individualfirm reduces or raises its own supply, the prevailing market price remains unaffected. The prevailing market price is the one which was set through the interaction of market demand and market supply forces, for which all the sellers and all the buyers together are responsible. One single seller has no option but to sell what it produces at this market determined price. This position of an individual firm in the total market is referred to as price taker. This is a unique feature of a perfectly competitive market.
Similarly, the 'large number' of buyers also has the same implication. A single buyer's share in total market demand is so insignificant that the buyer cannot influence the market price on his own by changing his demand. This makes a single buyer also a price taker. To sum up, the feature 'large number' indicates ineffectiveness of a single seller or a single buyer in influencing the prevailing market price on its own, rendering him simply a price taker.
2. The products of all the firms in the industry are homogenous
It means that the buyers treat the products of all the firms in the industry as homogenous. The products produced by the firms are identical, or treated as identical, or perfectly standardized. The buyers do not distinguish the output of one firm from that of the other. The implication of this feature is that since the buyers treat the products as identical they are not ready to pay a different price for the product of any one firm. They will pay the same price for the products of all the firms in the industry. On the other hand, any attempt by a firm to sell its product at a higher price will fail.
To sum up, the 'homogenous products' feature ensures a uniform price for the products of all the firms in the industry.
3. Perfect knowledge about markets for outputs and inputs. The firms have all the knowledge about the product market
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