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Perfect Competition

Perfect competition is a sort of market where many sellers and buyers are present to initiate selling and buying mechanisms. In a perfectly competitive market, no restrictions are there. No direct competition exists as sellers are predicted to sell homogenous or identical products. Welcome to this post that outlines a detailed analysis of the perfect competition market. 

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What Is Perfect Competition?

 

What perfect competition in economics means? A perfect market is an atomistic market. It is defined by different idealizing conditions, which collectively are called perfect competition. In economics, it signifies a particular market, which is easy for market players to exit and enter.

 

Importance Perfect Competition for Businesses and Consumers

 

Under a perfect competitive, prices reflect demand and supply. Companies can earn enough profit. Even startup costs, advertising, or marketing costs are low. So, entering the market for production or sales becomes easier for businesses. It is advantageous for consumers as it keeps prices low with high quality, choice, and services.

 

Outlining How Perfect Competition Works

 

No monopolies are present in a perfect competition model. Here, only one single firm supplies the service or goods, and the firm charges the price it wishes as consumers don’t have any other alternative. It also becomes difficult for budding competitors to enter this marketplace. The following points denote the process of how perfect competition works.

 

  • Firms sell an identical product
  • Firms are the price takers
  • No market share influences the price
  • Buyers have complete information about the product’s selling details and charges
  • Labor and capital resources are mobile
  • Firms can exit or enter the market without expenses

 

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Characteristics of a Perfectly Competition

 

Besides lower obligations and restrictions from the government and efficient transportation, a perfectly competitive market comprises the following characteristics. So, let’s learn the features of perfect competition.

 

A Large Number of Sellers and Buyers 

In this type of market, a large population of sellers and buyers are present. Sellers here are small, medium, and unorganized enterprises. Sellers and buyers maintain the demand and supply chain’s constancy in the market. 

 

Homogeneous or Identical Products

The best part of perfect competition is that firms sell homogeneous products with similar pricing and features. So, buyers fail to differentiate between products available based on their features. They don’t get any preference to choose a certain seller or product over the other.

 

Perfect Information and Transparency

Sellers have market acumen considering technological requirements, supply levels, and expenses. Buyers are well-informed about the service or product’s prices, quality, and features. So, there’s no chance of manipulation.

 

Freedom to Entry and Exit the Market Anytime

Production and startup costs in this type of competition are low. The product demand is also high. So, entering the market is easy, while exiting is easier. So, it means when a firm plans to exit, there are other players who take their position and fulfill the supply needs.

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Demand and Supply in a Perfect Competition Market

 

In a perfectly competitive market, no one can affect prices. Both the buyers and sellers know the market price. And there’s no excess demand or supply in the market-clearing price.

 

Market Demand and Individual Firm Demand

The market demand curve is downward sloping. On the other hand, the individual firm comprises a perfectly elastic demand curve. 

 

Market Supply and Individual Firm Supply

In a perfectly competitive market, firms are at the most competitive stage since they all sell identical products with almost limitless demand. So, a firm can supply what it produces at the market price. That means the supply curve for the individual firm remains the same as the marginal cost curve.

 

Equilibrium Price and Quantity in A Perfectly Competitive Market

In this type of market, equilibrium occurs at a given price and quantity. Here, the marginal cost of attracting a unit from the supplier is the same as the highest price attracting the purchase of a unit from the buyer.

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Comparison with Monopoly, Oligopoly, And Monopolistic Competition

 

Here’s a tabulated list of comparisons between monopoly, monopolistic, and oligopoly competition:

 

  Monopolistic Competition Oligopoly Competition Monopoly Competition
The monopolistic competition comprises multiple sellers. But they do not deal in identical products. They sell differentiated ones, so the prices are different, and so do the quality, convenience, style, brand name, and location. Oligopoly consists of a few sellers, where each seller supplies an excessively large portion of products sold in a marketplace. Owing to the fact that the cost of starting a business in the oligopolistic industry is high, there’s a lower number of firms entering this business universe. Considering the degree of competition and number of sellers, monopolies are just the opposite of perfect competition. In this type of competition, there’s just one seller. The market might be in a geographical area, like a regional area or city, and doesn’t have to be the whole entire country.

Uncovering 5 Advantages and 4 Disadvantages of a Perfect Competition

 

Get an insight into the five top advantages of perfect competition:

  • These markets are ideal market structures
  • Their focus is on consumers
  • Sellers do not have any pricing power
  • The features, rate, and quality of the product remain similar to perfectly competitive products.
  • Startup costs, advertising, marketing costs, and production are very low, so anyone can enter the market

 

Here’s presenting the top 4 disadvantages of a perfectly competitive market:

  • It’s a theoretical or hypothetical concept with negligible real-world existence
  • Sellers can’t add value to products since adding features or value doesn’t increase the price
  • The market comprises heavy competition, which is another disadvantage for sellers because of high freedom and low barriers to exit and entry
  • Existing sellers are well-established, so they have an advantage over the new players

 

Role of Profit Maximization in Perfect Competition

 

Profit maximization in perfect competition is the process firms undergo to ensure maximum output and price levels for the best returns. The choice for profit-maximizing in a perfectly competitive firm occurs at an output level where the marginal revenue remains equal to the marginal cost.

 

Efficiency and Consumer Welfare in Perfect Competition

Profit-maximizing firms demonstrate both allocative and productive efficiency. So, in the foreseeable future, the price remains equal to the minimum cost curve due to the process of exit and entry.

In a perfect competition, equilibrium is at point ‘K,’ with welfare at the maximum. Note that welfare is the sum of this market’s consumer as well as producer surplus.

 

Real-World Examples of Perfectly Competitive

Want to know more about perfect competition examples? The following are real-world examples (or the nearest approximations) of a perfectly competitive:

  • Agricultural markets producing similar crops like mango, wheat, rice, and more
  • Street food vendors like burger stalls and more

 

Challenges and Limitations of Perfect Competition

The limitations and challenges of a perfectly competitive include the following:

  • A perfectly competitive market is hypothetical or theoretical with negligible real-world existence
  • In this type of market, sellers won’t be able to add value (even if they do by adding features, they cannot increase the price, so their effort is pointless)
  • There’s heavy competition in this market
  • The existing sellers are reputed in this industry (so new players fail difficulties to take a stand until and unless the previous and well-established purposely exit the market)

 

Conclusion

In this guide, you have learned all about perfect competition. It is noteworthy to state that a perfectly competitive market is a hypothetical scenario. But there are a few businesses that apparently exist in perfect competition. The nearly best examples are street food vendors of a single category like pizza or burger and farmers selling the same crops like mangoes. Now that you have learned everything about the perfect competition market – let’s discover the FAQs from below.
Author Bio: Get more insights into Hero Vired’s courses. Discover more about the perfect competitive market from the certified course.

 

 

FAQ's

In perfect competition, prices remain dictated by demand and supply. Firms in this market are price takers as there's no single firm that has market control. Here, firms comprise a limited (or small) market share.
A large number of sellers and firms are present in this type of market. So, the contribution to the total output of this industry by a single firm is negligible. No one firm is there in a position that influences the market price by altering its output. So, the price is unchanged.
In this type of competition, firms can compete to attract customers. They offer products at a competitive price. So, consumers buy services and goods at prices lower than the maximum willingness to pay. Thus, it contributes to a surplus value that improves overall consumer satisfaction and welfare.
Truth be told, profit-maximizing companies in this market can combine with utility-maximizing customers. Right when they do so, something astounding occurs. With that stated, the resulting quantities of the outputs of services and goods assess both allocative and productive efficiency. Supernormal profits aren't made by companies in this competition. So, both the consumers and suppliers achieve what they want.
A perfect competitive market has some challenges, as mentioned in the following points:
  • It is a hypothetical or theoretical concept
  • Add value or features to the product is not possible for sellers as it won't affect the price
  • This market comprises heavy competition
  • The sellers who are already reputed will rule the marketplace (so it becomes challenging for new players to enter the market)

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