Conditions of perfect competition

Features and Conditions of perfect competition:

A) Large number of buyers and sellers:

There are a huge number of buyers and sellers in a perfect competitive market which neither a single buyer nor a single seller can persuade the price. The price is determined by market forces that are the demand for and supply of the product. There will be consistent price in the market. Sellers accept this price and regulate the quantity generated to maximize their profit. Therefore the sellers in the perfect competitive market are cost-takers and amount adjusters.

B) Homogeneous Product:

The products generated by all firms in a perfect competitive market should be homogeneous and similar in all respects that is, the products in the market are identical in quantity, size, taste, and so on. The products of various firms are perfect replacements and the cross-elasticity is infinite.

C) Perfect knowledge about market conditions:

Both buyers and sellers are completely aware of the current price in the market. Hence the buyer will not offer high price and the sellers will not admit a price less than the one existing in the market.

D) Free entry and Free exit:

There should be absolute freedom for the entry of new firms or the exit of the accessible firms from the industry. Whenever the existing firms earn super-normal profits, new firms come into the market. Whenever there is loss in industry, few firms leave the industry. The free entry and free exit are feasible only in the long run. That is since the size of the plant can’t be changed in short run.

E) Perfect mobility of factors of production:

The factors of productions must be free to move from one utilize to another or from one industry to the other easily to acquire better remuneration. The supposition of perfect mobility of factors is necessary to fulfill the initial condition that is, large number of producers in the market.

F) Absence of transport cost:

In a perfect competitive market, it is supposed that there are no transport costs. Under perfect competition, a commodity is sold at uniform price all through the market. When transport cost is acquired, the firms closer to the market will charge a low price than the firms distant away. Thus it is supposed that there is no transport cost.

G) Absence of Government or artificial restrictions or collusions:

There are no government restrictions or controls on supply, pricing and so on. There is also no collusion amongst sellers or buyers. The price in perfectly competitive market is free to modify in response to modifications in demand and supply situation.

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