Theory of Perfectly Competitive Market – its Features | New Topic [2024]

In this note, we are going to discuss about the Perfectly Competitive Market and Features of Perfect Competitive Market. Welcome to Poly Notes Hub, a leading destination for Diploma Engineering Notes for Engineering Students.

Author Name: Arun Paul.

What is Perfectly Competitive Market?

A perfectly competitive market is a theoretical market system that satisfies certain characteristics, including a large number of customers and sellers, homogeneous items, perfect knowledge, and free entry and exit.

A famous example of perfect competition is the agricultural market for a commodity like wheat.

Features of Perfectly Competitive Market

Perfect competition is a theoretical market structure that includes specific features, like –

1. Many buyers and sellers: There are numerous buyers and sellers in the market, none of whom have the power to influence the market price individually.
2. Homogeneous products: Products sold in a perfectly competitive market are identical or homogeneous. Consumers perceive no difference between the products offered by different sellers.
3. Perfect information: Both buyers and sellers have complete knowledge about market conditions, including prices, quality, and availability of goods and services.
4. Free entry and exit: Firms can enter or exit the market without restrictions. There are no barriers to entry, such as patents, licenses, or high startup costs.
5. Price takers: Individual firms in a perfectly competitive market are price takers, meaning they accept the market price as given and adjust their quantity supplied accordingly. They have no control over the market price.
6. Perfect mobility of factors of production: Resources, such as labor and capital, can move freely between different uses and industries, ensuring efficient allocation.
7. Profit maximization: Firms in perfect competition aim to maximize profits. In the long run, in equilibrium, firms earn zero economic profit (normal profit), as entry and exit of firms adjust until all firms earn just enough to cover their opportunity costs.
8. Non-collusion: Firms do not collude or engage in cooperative behavior to manipulate prices or restrict output.
9. No externalities: There are no external costs or benefits associated with production or consumption in a perfectly competitive market.