5 Marks Each

Question

Explain Characteristics of Perfect Competition.

Vidyadip · Accepted Answer

Characteristics of perfect competition:
$1.$ Numerous buyers and sellers:

A market with perfect competition has numerous a very large indefinite number of buyers and sellers.
Of these numerous sellers, a single seller is a very small part of the market.
So, neither he can control or monopolize the wholesale market, nor he can influence the market price.

Example:

In a wheat farm, the increase or decrease in production of a single farm will not affect the total production of the wheat. This means the owner of the farm is a very small part of the huge market and so he cannot influence the market price.
In such market, the buyers are also numerous. Hence, even they cannot . influence market price. Thus, in perfect competition market, the market ’ price depends only on the factors like demand and supply.

$2.$ Identical products:

Products that have similar features, form, shape, colour, taste, weight, quality, etc. are called identical products. Since these products have a lot of similarity they are called as identical or similar products. Identical products can be used as substitutes of each other.
In perfect competition market, the producers or sellers cannot set different prices for identical products because the buyers are not ready to pay different prices for products having similar characteristics and quality.

$3.$ Free entry and exit of firms:

In this market, there is no restriction on the entry and exit of the firms. When the firms are gaining abnormal profits, new firms may freely enter the market. Similarly, when the firms are suffering from abnormal losses, they are free to exit the market.
The free entry and exit of the firms is seen for a temporary time period. The firms get attracted by the profits and enter such markets for a very short period. As soon as they witness loss, they exit from the market.
In case of a longer time period, if the market is such that it gives normal profits, there is less movement of firms. The reason for this is that when the industry reaches at a normal profit, new firms or sellers do not get attracted as the profits are not high. Similarly the firms also do not exit the markets because they are getting normal profit and are not suffering any losses.

$4.$ Perfect knowledge of the market:

In such market, the producers, buyers, sellers all have the complete knowledge of the market including product availability, product price, etc.
The producers or sellers have the knowledge of the price at which the other producers or sellers are selling the product.
They are also aware about the quality of the identical or substitute products.
Thus in this market a seller cannot charge different prices for identical products.
The buyers also know the price of the products and their quality. Hence, the seller cannot demand different prices from the buyers.
Owing to all these reasons, the perfect competition market has perfectly elastic demand curve.

$5.$ Mobility of factors of production:

The four factors of production, namely land, capital, labour and entrepreneur are dynamic and mobile in both physical forms as well as in terms of profession and usage.
The price (compensation) of the factors of production remains same.
In order to prevent from shifting of compensation from low to high due to dynamic and mobile nature of the factors of production, the firms are uniformly compensated.

$6.$ No transportation expense:

There are numerous buyers and sellers in perfect competition.
The expenses of transportation are so nominal as compared to the total expense that they are not counted.
Thus zero transportation expense is an important characteristic of the perfect competition.

Answer