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Forms of Market Structure-PERFECT COMPETITION 


Perfect Competition is a theoretical Market Structure that features unlimited contestability (No barriers to enter) and unlimited number of producers and consumers, and a Perfect Elastic Demand Curve.

Perfect competition is a market structure where an infinitely large number of buyers and sellers operate freely and sell a homogeneous commodity at a uniform price.

Features of Perfect Competition

Infinitely Large number of Buyers and Sellers

  • When there are a large number of buyers, no individual buyer can influence the market price. Similarly when there are a very large number of sellers, each firm or seller in a perfectly competitive market forms an insignificant part of the market.
  • Therefore, no single seller has the ability to determine the price at which the commodity is sold. So who determines the price in such a market? In a perfectly competitive market, the forces of Market Demand and Market Supply determine the price of the commodity.
  • Since each firm accepts the price that is determined by the market, it becomes a Price Taker. As the market determines the Price, it is the Price Maker. PERFECT COMPETITION
  • No firm in its individual capacity can alter the price given to it by the market. If any firm were to change a price higher than market determined price, buyers would shift to another firm. No firm would like to charge a price lower than the market determined price, as by doing so it loses revenue.

Homogenous Production

  • In a perfect competitive market, firms sell homogeneous products. Homogenous products are those that are identical in all respects i.e. there is no difference in packaging, quality, colours etc.
  • As the output of one firm is exactly the same as the output of all the others in the market, the products of all firms are a perfect substitute for each other.

Free Entry into and Exit from the market

  • Very easy entry into a market means that a new firm faces no barriers to entry. Barriers can be financial, technical or government imposed barriers such as Licenses, Permits and Patents.
  • The implication of this feature of Perfect Competition is that while in the short run firms can make either supernormal profits or losses, in the long run all firms in market earn only normal profits.

(4) Perfect Knowledge of Market

  • Buyers and Sellers have complete and perfect knowledge about the product and prices of other sellers. This feature ensures that the market achieves a uniform price level. PERFECT COMPETITION


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