The other name for perfect competition is “Pure Market.” Therefore, before you start reading this article. Let me tell you that perfect competition is a myth. It doesn’t exist in real life. Then, what is the use of learning about the perfect competition?
So, let me tell you. It is important to learn perfect competition in order to learn about the imperfect competition. You can use perfect competition to contrast and compare with imperfectly competitive markets. Moreover, the understanding of perfect competition has become essential with the emergence of the e-commerce market. Because in the e-commerce market, the gap between seller and buyer have reduced.
Perfect competition is a theoretical market structure in economics. In a perfect competition market, there are a large number of buyers and sellers. All the participants of perfect competition have complete knowledge of the market condition. The products sold in perfect competition are homogeneous products with the same price everywhere.
In the article ahead, you will learn about the different characteristics of perfect competition.
1. A large number of sellers and buyers
The first and most important characteristic of perfect competition is a large number of buyers and sellers. The size of seller organizations is quite small as compared to the overall size of the market. That means no single seller can control the market and the price of the product. For example, the market will remain unaffected if one organization stops producing or doubles the price of the product. The price of the product is not get affected by the decision made by one organization.
Let us understand the concept of a perfect market with the help of a simple example. Take the example of an apple market. Many families have their Apple orchard and sell apples in the market. If one seller decides to leave the business, then the Market will not get affected. Similarly, if a seller chooses to produce more apple, then again, the market of Apple and the price of apples will change.
2. Identical Product
In a perfect competition market, completely similar products are sold. Products produced by sellers are also called homogeneous products. That means, there is no difference between the quality and features of two products sold by two different sellers.
In perfect competition, products are so similar that buyers can’t tell the difference between two products sold by two different sellers. Because of this reason, buyers can buy a product from any seller. In case one seller increases the price of the product, the buyer can easily switch to other sellers.
For example, in the previous example, the apples sold by all sellers will be of the same taste and will serve the needs of the buyers.
3. Low or no Government restrictions
The government has little or no control over the perfect competition market. Sellers decide the price of goods without any control or limitation by the official body or government. Similarly, buyers also have the freedom to buy products sold by the sellers.
4. Cheap or low transportation cost
In perfect competition, the transportation cost of products is low. Transportation cost plays an essential role in the success of every business. The price of goods increases and decreases depending on the transportation cost. Because a seller has to cover the transportation cost from the selling price of goods.
The more the transportation cost more will be the selling price of the goods. Therefore, in perfect competition, it is assumed that there is no cost of transport takes place for moving things from one place to another.
5. Availability of perfect knowledge
In perfect competition, all the sellers and buyers have complete knowledge about the market. Buyers are aware of the price of the product. That means, in a perfect competitive market, buyers can be deceived by selling products at higher prices than the actual price of the product.
Moreover, all firms have similar knowledge of production. That means, no firm can change the price of the product by improving the quality and features of the product by making changes in the production process.
6. No restriction on entry and exit for firms
In a perfectly competitive market, there is no restriction on the entry and exit of any organization in the market. The firms are free to enter and exit the market at any time. They are not restricted by government rule or start-up costs of the business.
Similarly, the perfect competition market, the market doesn’t get affected when a firm leaves the market. Because in the perfect competition market, all the firms are of the same size and they sell the same products. Therefore, when a seller leaves the business, all his buyers can move to other sellers.
For example, an XYZ seller can leave apple business at any time without any restriction. Similarly, the buyers will also not get disturbed by the exit of the XYZ firm from the business. They can continue buying apples from other sellers at a similar price as were buying from the XYZ firm.
7. No individual control over the price of products
A perfect market consists of many small seller firms. All the seller firms have the same control over the market and the price of the product.
The price of the product is not controlled by one organization as it is done in a monopoly market. Because of this reason, the price in the perfect competition market remains fair.
8. Lesser attachment between buyers and sellers
Usually, in other market structures, a relationship builds between a seller and a buyer. A buyer always prefers to buy from a particular buyer because of different reasons. However, this is not the case in perfect competition.
Because in perfect competition the same product is sold by all sellers at the same price. Therefore, buyers buy from any seller, depending on their convenience.
9. Freedom to move products
In perfect competition, a seller has the freedom to take his goods anywhere without any restriction in order to get a higher price. A seller can also take his production process to a place where the production cost will be less.
10. No need for advertising
In a perfect market, no seller is required to advertise its products. Because in a perfect market, a sufficient number of buyers are available for each seller. Buyers are aware of the features and qualities of the products.
Therefore, there is no need to spend extra on advertising to acquire more customers.