Perfect Competition
It should be noted that competition has different interpretations in economics and business. Businessman regards competition as a process of rivalry where firms try to gain advantage through pricing decisions, advertising, Rand D, product quality and other means. In economics, however, when there is perfect competition, firms cannot engage in rivalrous behaviour because they are price takers in the market.
Characteristics of Perfect Competition
The main features of perfect competition are discussed here. They are necessary for a firm to be a price taker.
1. The competitive market is composed of a large number of sellers and buyers, each of which is small in relation to the total market.
2. Outputs of the firms in such a market are regarded as perfect substitutes for one another or are so perceived by the buyers. All firms produce a standard, homogenous and undifferentiated product.
3. Buyers have perfect information about cost, price, and quality of competing goods. Consumers will not pay a higher price than necessary for the product. Graphically
A firm has to adjust its production and sales policies to the given market price. Since the seller has no control over the price at which he sells, his AR and MR schedules are infinitely elastic AR = MR because every unit is sold at the same market price irrespective of the quantity sold. Sales can be increased at the same price and more revenue can be earned with increase' in sales.
4. Perfect competition assumes easy entry and exit from an industry. If a price is above cost, resulting in economic profit, resources can be mobilized to create new firms or to expand the production capacity of firms already in the industry. If profits are below average, resources like raw material, labour and capital can easily be transferred from the industry and used to produce other products at higher profit rates. There are no patents or copyrights, and vast amounts of capital are not necessary to enter the market. Already established firms do not have any lasting cost advantage over entrants because of experience or size.
5. There is perfect mobility of resources. The workers and inputs can easily move from one job to another and can respond very quickly to monetary incentives.
Stock market is closest to perfect competition. Agricultural commodities like wheat and vegetables fall under perfectly competitive market structure.
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