Question

What do you mean by Perfect Competition? Discuss its salient features.

Hint:

Under perfect competition: $P=MR=AR$ and long-run $P=\text{min}\,LAC$ with zero economic profit.

Answer 1

Meaning: Perfect competition is a market structure in which numerous small buyers and sellers trade a homogeneous product under conditions of perfect knowledge and free entry and exit, so that no individual participant can influence price. Firms are price takers.
Features: (1) Large number of buyers and sellers: Each is too small relative to the market to affect price by individual action. (2) Homogeneous product: Buyers regard output units as identical; no brand or quality differentiation. (3) Free entry and exit: In the long run, firms can enter/leave without barriers, driving economic profit to zero. (4) Perfect information: Buyers and sellers know prices, technology, and costs; arbitrage eliminates price differences. (5) Perfect mobility of factors: Resources can move across firms/industries; no artificial restrictions. (6) No selling costs: Advertising is unnecessary because products are identical. (7) Single, uniform price: Determined by market demand and supply.
Firm's demand and equilibrium: A firm faces a perfectly elastic (horizontal) demand at the market price: $AR=MR=P$. Profit maximization occurs where $MC=MR$; in the short run the firm may earn supernormal profits or losses; in the long run, entry/exit ensures $P=\text{min}\,LAC$ (productive efficiency) and $P=MC$ (allocative efficiency).
Implications: Perfect competition yields the benchmark of maximum total surplus with no deadweight loss under standard assumptions.
Limitations: Real markets rarely meet all conditions; however, agricultural commodities, foreign exchange, or stock exchange trading approximate some features.