Friday, 18 May 2018

Forms of Market - Perfect Competition

A perfectly competitive market is one in which there are a large number of buyers as well as sellers of a homogeneous product. Hence supply/output of any one seller is just a fraction of total output/supply of the product

Following are features of Perfect Competition -

1. The sellers are the price takers- Since there are a large number of sellers in the market, no single supplier can influence the market price. This is because supply of each seller is just a negligible fraction of total supply. Hence, the market price of the product is determined on the basis of total market demand and the total market supply and so the sellers have to accept this market price. Hence, sellers are price takers and not price makers in this form of a market.

2. A large number of buyers- There are a large number of buyers in this form of market and hence even the buyers are price takers. The demand of each buyer is a negligible portion of total market demand.

3. Homogeneous Product- The product of every supplier is identical in every aspect. They are exactly same in shape, size, color, weight, quality etc. Thus the products of all suppliers are perfect substitutes for each other.

4. Free entry and exit- There are no barriers to entry and exit in the market. Any firm can enter or exit the market any time it wants

5. Single Price - All units of the product have a uniform price which is determined by the market. In other words, the price is determined by demand and supply position of the product in the market.

6. All factors of production are perfectly mobile- Under perfect competition, all the factors of production enjoy complete freedom of movement. Thus, all four factors can be moved from one place to another freely. Hence, no producer is at a disadvantage due to unavailability of any factor and has access to all factors all the time

7. Perfect knowledge- All the buyers and sellers have perfect knowledge of the market. Hence, no buyer will end up paying a higher price. This also prevents any seller from charging a different price than the prevailing market price

8. The absence of transportation cost- It is assumed that there is an absence of transportation cost and hence there will be no difference in transportation cost between the sellers. Transportation cost will be zero for all the sellers.

9. No Interference of government - There is no interference of the government in the market.

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