Perfect Competition

Riyaz Ahmad Kuchay

Assistant Professor (Economics)
GDC Sumbal
Perfect Competition
One of the forms of Market Structure

Other forms of market structures include

 Monopoly
 Bilateral-monopoly
 Monopolistic Competition
 Oligopoly
 Duopoly
 Monopsony
Market
An arrangement whereby buyers and sellers of a
commodity interact to negotiate the exchange
(sale and purchase) of a commodity at some
price.
Essential Components of a Market
 Commodity (good/service)
 Seller
 Buyer
 Interaction between buyer and seller
 Rules and conventions
 Price

Every commodity has a separate market

 Market for cars,
 Market for mobiles,
 Market for pens
Market Structure
The manner in which the constituent parts of
a market are arranged together

Characteristic Features of Market Structure

 Number of sellers of a commodity
 Number of buyers of the commodity
 Difference in the products of different sellers
 Ease of entry and exit
Competitiveness of a Market
The power which an individual firm has to
influence the price of the product it sells, also
called market power.

The competitiveness and the market power are

negatively related with each other

zero market power maximum competitiveness

Perfect Competition
A market situation in which each firm has zero market
power or no power to influence the price of the product
it sells.

Other names
 Perfectly competitive market structure
 Competitive market
 Pure competition
 Free competition,
Features/Assumptions of Perfect Competition

Large Number of Sellers and Buyers

Homogeneous Product
Perfect Knowledge
Free Entry and Exit of the Firms
No Government Intervention
Price-Taking Behaviour
Horizontal Demand Curve faced by the Firm
Normal Profits in the Long Run
Horizontal Demand Curve
Perfect Competition
(Definition on the basis of features)

Perfect competition is a market form in which

number of fully informed and unregulated sellers
and buyers of a homogeneous product is very
large so that each seller sells and each buyer buys
only a negligible part of total output because of
which no individual seller or buyer is able to
affect the market price and hence they act as price
takers earning normal profits in the long run.
Perfect Competition in Real World
No market is 100% perfectly competitive
( all assumptions not satisfied)

Hypothetical/Imaginary market structure

Approximations
Foreign Exchange Market
Market for Financial Securities
Market for some primary commodities
Importance of Perfect Competition

Acts as a standard or benchmark in matters of

efficiency

An ideal market form

Efficiency Characteristics of Perfect Competition
Most efficient market form
 Productive efficiency -production at minimum
cost
 Allocative efficiency -production at minimum
cost & as per the wishes of consumers
Maximum economic surplus (CS+PS maximum)
Economic Efficiency
Limitations of Perfect Competition

 Fairness in income distribution not guaranteed

 Lack of variety in goods
 Not suitable even on efficiency grounds
-presence of large economies of scale
-Natural monopoly
 No incentive for investment in research and
development
The End