Characteristics of Perfect Competition

A perfect competitive market has the following basic characteristics

• Innumerable Buyers and Sellers

Under perfect competition there are innumerable buyers and sellers of the goods competing among themselves. The number of buyers and sellers is so large that no single buyer or seller by his own actions can influence the total supply or price of the commodity. Their contribution to total transactions is just like a drop in the ocean. They accept the market price as a given datum and only decide the amounts of goods to be purchased or sold. They are price takers not price makers.

• Homogeneous Product

Under perfect competition, commodities sold by all sellers are homogeneous. Both the internal quality and external appearance of the good are exactly equal. As a result buyers have no chance to prefer the produce of any particular seller to those of other sellers. Wheat or paddy of a certain variety produced from land of equal quality may be accepted as an example here. When goods are homogeneous, all units are sold at a single market price.

• Free Entry and Exit Of the Firms

Under perfect competition, firms have the full freedom to enter into or quit the business. Any one of the existing firms can quit the business to seek profit elsewhere or outside firms can freely enter into the business to compete with the existing firms. This is possible only in the long-run, In the short-run the number of sellers are fixed. The loss making firms have the tendency to quit but they cannot. In case of super normal profit, outside firms can only enter into the business in the long-run to compete away the super normal profit. As a result the firms under perfect competition earn only normal profit in the long-run.

• Perfect Knowledge About the Market

Under perfect competition both buyers and sellers must have perfect knowledge and information about the price and the product. In case of any change, it is immediately known to all. Buyers of the commodity should be sufficiently aware of the market condition so that they do not pay higher prices when the commodity can be had a lower prices. Similarly the sellers should have the full knowledge so that they do not charge higher prices to lose of their customers.

• Perfect Mobility Of the Factors

Under perfect competition there is perfect mobility of the factors of production. This enables the new firms the new firms to enter the industry. Due to perfect mobility. Factor prices to be equal. Free mobility of factors presupposes the absence of any artificial restrictions such as those imposed by the trade unions or the state. 

• Absence of Transport Cost

Under perfect competition all producers are sufficiently close to each other so that transport costs are nil. This is essential to equalise the competitive strength of different sellers.

• A Single Price

Under perfect competition, a single price prevails in the market. This is the logical outcome of the above features which are assumed to be present in a perfect market. The price is determined by the market forces of demand and supply. An individual seller has to accept the market price as a given datum and only adjusts the output to be sold. So he is a price taker and output adjuster.  ‘Accept or quit’ is the only alternative available to a seller under perfect competition.