Forms of Market Structure - Perfect Competition

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Notes

Perfect Competition :
Meaning and Definition :
Perfect competition is an ideal and imaginary concept of market rather than an actual market. According to Mrs. Joan Robinson, “Perfect competition prevails when the demand for the output of each producer is perfectly elastic.”
A perfectly competitive market is one in which the number of buyers and sellers is very large. All the buyers and sellers are engaged in buying and selling a homogeneous product without any restrictions. Moreover both buyers and sellers possess perfect knowledge of market conditions. 

Following are the features of Perfect Competition :
1) Large number of sellers and buyers :
Under perfect competitions, there are large number of sellers and buyers. As mentioned earlier, each seller forms a negligible part in the total market. Hence, none of them is in a position to influence the price and supply in the market. Thus, sellers are price takers under perfect competition. The number of buyers is also large. The share of each buyer is so negligible that none of them is in a position to influence the price in the market.
2) Homogeneous product :
An important feature of a perfectly competitive market is that the product sold is homogeneous or identical in respect of size, design, colour, taste etc. All the products are perfect substitutes to each other.
3) Free entry and exit :
There are no barriers to the entry and exit of firms. Any firm can enter or quit the industry at its own will. If there is hope of profit, the firm will enter the market and if there is possibility of loss the firm will leave the market.
4) Single price :
A single uniform price prevails under perfect  competition which is determined by the interaction of demand and supply.
5) Perfect knowledge of market :
The buyers and sellers possess a perfect knowledge about the market conditions. Every seller and buyer has the knowledge about price, quality, source of supply of products etc.
6) Perfect mobility of factors of production :
There is perfect mobility of factors of production under perfect competition. Labour and capital are mobile not only geographically but also occupationally.
7) Absence of transport cost :
In perfect competition, price is uniform because we assume that transport cost does not exist. This assumption will lead to uniformity in price.
8) No government intervention :
Laissez-faire policy is an important feature of perfect competition. It means there is absence of Government intervention in economic activities.

Example:

Consider the wheat market. Many farmers grow wheat, and market share is dispersed among them. There are no farmers that could potentially affect the price of wheat on the market.

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