Perfect Competition - Definition
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Perfect Competition DefinitionPerfect competition is a type of market structure where all companies or firms are selling the same product, and because of having no control over their product prices, they tend to be price takers. In this market, consumers have full or perfect knowledge about the product that is on sale. They know what firm charges what price for a specific product. There is a perfect mobility in terms of resources including labor, and there are no barriers to entry and exit involved for such firms.
A Little More on What is Perfect CompetitionThe concept of perfect competition is different from the practical imperfect competition. The latter takes place when there is a violation of principles associated with the former. As all real markets prevail on the outer boundaries of the perfect competition approach, they can be considered as imperfect. The Cambridge tradition of post-classical economic thought gave origin to the modern theory of perfect vs imperfect competition. (Note: In the real world, there is no such thing like perfect competition. Firms with huge competition existing in liquid markets for homogenous products like wheat, can be considered as the nearest practical examples).
How perfect competition works?Perfect competition refers to a standard that enables the comparison of different market models. In theoretical language, it is totally the antonym of a monopoly where there is only one firm selling a product or service. Being the sole supplier and because of no competition, the firm becomes the price maker and has the ability to set any price for their products. They know that customers will buy their product no matter how high they set the prices. However, in perfect competition, there are lots of buyers and sellers for homogenous products, and this regulates the market demand and supply. Firms manage to stay in a profitable position so as to keep their business going. Because of no barrier to entry, new firms can enter the market at any time, and affect the profitability of the existing firms. A market that is perfectly competitive has the following features:
- All companies sell homogenous products.
- All companies are price takers and not price makers.
- All companies enjoy lesser market share.
- Buyers already have knowledge about the type of product being sold followed by its prices.
- The firms can enter or exit the industry any time they want.
- Perfect competition refers to a particular type of market model that involves a huge number of buyers and sellers having perfect or complete information of homogenous products.
- Perfect competition and monopoly are completely in contrast to each other.
- Real markets prevail beyond the boundaries of perfect competition market, and hence are referred to as imperfect.