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What is a Perfect Competitive Market? Assumptions and Features
Perfect competition is a market form. In economics there are many forms of markets like monopoly market, oligopoly market, monopolistic market etc. perfect competition is one of them, and actually it is a form of imaginary or ideal condition. Once the perfect competitive market is come in to reality the optimum utilization of resources is possible. This hub IS briefly described about the perfect competition market and its assumptions.
What is a Perfect Competition Market?
Simply, perfect competition is a market condition where large number of individual sellers competes each other, but no one can dominate in the market. So, all the products will be perfect substitute or same. In such a market all firms can make only normal profit. The total revenue of a firm is depending on how much they sold.
The major assumptions of a perfect competitive market are listed below.
a) Large number of buyers and sellers:
It is an independent assumption of this market form, there exist large number of buyers and sellers.
b) Homogeneous product and single price:
In a perfect competition market firms are supplying same commodities having same attributes. So, the commodities are perfect substitute. Further prices of commodities are same. Because they are supplying unique products. If anyone raises the price, buyers will move to other sellers.
c) Freedom to entry and exit and no collusion:
Any new firm can enter and any existing firm can withdraw from the industry. There is no restriction. When the industry in loss the existing firm can exit and when industry in abnormal profit new firm can enter in to the industry or market. So, in a perfect competition market sellers can make normal profits only. Further there is no any kind of collusion or agreements. Because this form of market is free from restrictions and monopoly power.
d) Profit maximization:
All the firms are focusing to penetrate maximum profits from the market. Since it is a highly competitive form of market condition, anyone can survive when they suffer losses. So, profit is very essential for the smooth running of a firm in a perfect competitive market.
e) No transport cost:
it is very important assumption of a perfect competition market. It is assumed because, in the market there only single price for all commodities. When transport cost and other costs like advertisements spend by a firm, it will result in the increasing of total cost and by the price of the commodity. Due to the price is fixed we assume that there is no transport cost.
f) Perfectly elastic price curve:
The price curve of a firm in a perfect competitive market is perfectly elastic. Because of the price are fixed sellers can only adjust their quantity of supply of commodities. So, sellers can change the quantity of supply of a commodity even there is no any change in price, which is why price curve is perfectly elastic one. See picture I
g) Price takers:
Price takers refer to the ability of one person to buy or sell commodities at a given price. In a perfectly competitive market no one can fix price. it is fixed by market. So, buyers and sellers are price takers in a perfectly competitive market.
h) Perfect mobility of factors of production;
It refers to the free movement of factor. They are monopolized by any one. Today it is an unrealistic assumption. Because now, there exists transport restrictions on people and goods between countries.
i) Perfect knowledge:
In a perfectly competitive market, we assume that both the sellers and buyers having perfect knowledge about all the things in the market like price, other competitors etc. it is also an imaginary assumption because no one can secure perfect knowledge about an industry without missing any silly information.
PERFECT COMPETITION AND PURE COMPETITION
Perfect competition and pure competition is almost same except a narrow differences in two assumptions listed above. When all the above assumptions are satisfied it can be said to be pure competition. When all assumptions are satisfied except perfect knowledge and mobility of factors of production, it becomes perfect competition. IE,
Pure competition = perfect competition – perfect knowledge – perfect mobility of factors of production.
Perfect competition is an ideal or imaginary market form described in economics. In short, the perfect competition market is one built up by many unrealistic assumptions. But it is essential to study about perfectness and to solve the actual problems existed in the market.