What are the characteristics of a perfectly competitive market?
This type of market structure refers to the market that consists
of a large number of buyers and also a large number of sellers.
No individual seller is able to influence the price of an
existing product in the market. All sellers in a perfect
competition produce homogenous outputs, i.e. the outputs of all
the sellers are similar to each other and the products are
Features of Perfectly Competitive Market
1) A large number of buyers and sellers
There exist a large number of buyers and sellers in a perfectly
competitive market. The number of sellers is so large that no
individual firm owns the control over the market price of a
Due to the large number of sellers in the market, there exists a
perfect and free competition. A firm acts as a price taker while
the price is determined by the
i.e. by 'demand
Thus, we can conclude that under perfectly competitive market, an
individual firm is a price taker and not a price maker.
2) Homogenous products
All the firms in a perfectly competitive market produce
homogeneous products. This implies that the output of each firm
is perfect substitute to
output in terms of quantity, quality, colour, size, features,
etc. This indicates that the buyers are indifferent to the output
of different firms. Due to the homogenous nature of products,
existence of uniform price is guaranteed.
3) Free exit and entry of firms
In the long run there is free entry and exit of firms. However,
in the short run some fixed factors obstruct the free entry and
exit of firms. This ensures that all the firms in the long-run
earn normal profit or zero economic profit that measures the
opportunity cost of the firms either to continue production or to
shut down. If there are abnormal profits, new firms will enter
the market and if there are abnormal losses, a few existing firms
will exit the market.
4) Perfect knowledge among buyers and sellers
Both buyers and sellers are fully aware of the market conditions,
such as price of a product at different places. The sellers are
also aware of the prices at which the buyers are willing to buy
the product. The implication of this feature is that if any
individual firm is charging higher (or lower) price for a
homogeneous product, the buyers will shift their purchase to
other firms (or shift their purchase from the firm to other firms
selling at lower price).
5) No transport costs
This feature means that all the firms have equal access to the
market. The goods are produced and sold locally. Therefore, there
is no cost of transporting the product from one part of the
market to other.
6) Perfect mobility of factors of production
There exists geographically and occupationally perfect mobility
of factors of production. This implies that the factors of
production can move from one place to other and can move from one
job to another.
7) No promotional and selling costs
There are no advertisements and promotional costs incurred by the
firms. The selling costs under perfectly competitive market are
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