Question

What is perfect competition? Highlight its salient features.

Hint:

Perfect competition is a theoretical benchmark. While few real-world markets are truly "perfect," agricultural markets (like for wheat or corn) are often cited as the closest examples.

Answer 1

Perfect competition is a market structure where a large number of buyers and sellers trade a homogeneous (identical) product, and no single buyer or seller can influence the market price. Firms in this market are "price takers."
Salient Features of Perfect Competition:

Large Number of Buyers and Sellers: The market consists of so many participants that no single individual has any control over the price.
Homogeneous Product: All firms sell an identical product. From the consumer's perspective, the product of one firm is a perfect substitute for the product of another.
Freedom of Entry and Exit: Firms can freely enter the industry to earn profits and exit if they are incurring losses. There are no barriers to entry or exit.
Perfect Knowledge: Both buyers and sellers have complete information about the market conditions, including prices and quality of the product.
Perfect Mobility of Factors of Production: Resources like labor and capital can move freely from one firm to another or from one industry to another.
No Selling Costs: Since the products are homogeneous, there is no need for advertising or other sales promotion activities.