Perfect competition is a market structure in which many firms sell identical products, and no barriers to entry into the market exist for new potential sellers. Robinson said, perfect competition prevails where the demand for output of each producer is perfectly elastic. Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific characteristics may include:
1. Infinite buyers and sellers –
An infinite number of consumers with the willingness and ability to buy the
product at a certain price, and infinite producers with the willingness and
ability to supply the product at a certain price.
2. Zero entry and exit barriers –
A lack of entry and exit barriers makes it extremely easy to enter or exit a
perfectly competitive market.
3.
Perfect factor mobiity In the long run factors of production are perfectly mobile, allowing free long term adjustments to
changing market conditions.
4.
Perfect information - All consumers and producers are assumed to have perfect knowledge of
price, utility, quality and production methods of products.
5.
Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods
in a perfectly competitive market.
6.
Profit maximization - Firms are assumed to sell where marginal costs meet marginal revenue,
where the most profit is generated.
7.
Homogenous products - The qualities and characteristics of a market good or service do not
vary between different suppliers.
8.
Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale)
ensures that there will always be a sufficient number of firms in the industry.
9.
Property rights - Well defined property rights determine what may be sold, as well as
what rights are conferred on the buyer.
10. Rational behavior of buyers and sellers
11. No carrying cost
12. Fixed and same price