What Is Perfect Competition?

Perfect competition is an economic term that refers to a theoretical market

structure in which all suppliers are equal and overall supply and demand are in
equilibrium. For example, if there are several firms producing a commodity
and no individual firm has a competitive advantage, there is perfect
competition. In this ideal market, quality is comparative across firms, and
buyers can purchase the product for the lowest possible price.

In economic theory, perfect competition occurs when all companies sell

identical products, market share does not influence price, companies are able to
enter or exit without barrier, buyers have perfect or full information, and
companies cannot determine prices. In other words, it is a market that is
entirely influenced by market forces. It is the opposite of imperfect
competition, which is a more accurate reflection of a current market structure.

Assumptions of the Model

The assumptions of the model of perfect competition, taken together, imply that
individual buyers and sellers in a perfectly competitive market accept the
market price as given. No one buyer or seller has any influence over that price.
Individuals or firms who must take the market price as given are called price
takers. A consumer or firm that takes the market price as given has no ability to
influence that price. A price-taking firm or consumer is like an individual who
is buying or selling stocks. He or she looks up the market price and buys or sells
at that price. The price is determined by demand and supply in the market not
by individual buyers or sellers. In a perfectly competitive market, each firm and
each consumer is a price taker. A price-taking consumer assumes that he or she
can purchase any quantity at the market price without affecting that price.
Similarly, a price-taking firm assumes it can sell whatever quantity it wishes at
the market price without affecting the price.
You are a price taker when you go into a store. You observe the prices listed
and make a choice to buy or not. Your choice will not affect that price. Should
you sell a textbook back to your campus bookstore at the end of a course, you
are a price-taking seller. You are confronted by a market price and you decide
whether to sell or not. Your decision will not affect that price.
Characteristics of Perfect Competition 

Perfect competition is a theoretical market structure with several

characteristics. Economists studying macroeconomics and microeconomics
use these ideal constructs as benchmarks to compare the operation of real
markets:

1. Homogenous products: In perfect competition, all firms produce the

same product, making it a commodity. The basic aspects of the product
are consistent, including the overall quality. 
2. Price takers: The market price is equal to the marginal cost of
production, and no single firm has the power to charge more. The other
firms will undercut any firm charging higher prices. Market demand is
stable over the long run, so all producers have similar market share. 
3. Profitability: While there may be short-run profits for individual firms
quicker to market, the long-run equilibrium of perfectly competitive
markets means that, eventually, no firm makes economic profit. New
producers entering the market bring down the demand curve, and no
firm is able to increase product prices to sustain profits. 
4. Free entry: There are no barriers to entry or exit in a perfect
competition. Any startup firm can be a competitive firm by producing
the product at the same marginal cost as others. Moreover, leaving the
market incurs no cost to producers. 
5. Rational buyers: In this theoretical market, all buyers make rational
purchases to maximize their economic utility and seek a lower price.
Also, these buyers have perfect information about the products they are
purchasing, meaning they know the price points across different firms. 
6. Mobile resources: The labor and the capital involved in a perfect
competition are mobile and can move wherever they need or want to,
with no associated cost. 
7. Regulation: In a perfectly competitive market, the process of making,
selling, or using goods does not affect any third party. Thus, there is no
need for government licensing or regulation.
8. There are too many sellers and buyers to take control of the market.
Examples of perfect competition

In the real world, it is hard to find examples of industries which fit all the
criteria of ‘perfect knowledge’ and ‘perfect information’. However, some
industries are close.

1. Foreign exchange markets. Here currency is all homogeneous.

Also, traders will have access to many different buyers and sellers.
There will be good information about relative prices. When buying
currency it is easy to compare prices
2. Agricultural markets. In some cases, there are several farmers
selling identical products to the market, and many buyers. At the
market, it is easy to compare prices. Therefore, agricultural
markets often get close to perfect competition.
3. Internet related industries. The internet has made many markets
closer to perfect competition because the internet has made it very
easy to compare prices, quickly and efficiently (perfect
information). Also, the internet has made barriers to entry lower.
For example, selling a popular good on the internet through a
service like e-bay is close to perfect competition. It is easy to
compare the prices of books and buy from the cheapest. The
internet has enabled the price of many books to fall in price so that
firms selling books on the internet are only making normal profits.
4.

Advantages of the Perfect Competition

 They can achieve the maximum consumer surplus and economic welfare.

 All the perfect knowledge is available so there is no information failure.

 Only normal cost profits cover the opportunity cost.

 They allocate resources in the most efficient way.

Disadvantages of the Perfect Competition:

 There is no chance to achieve the maximum profit because of the huge

number of other firms that are selling the same products.

 There is no courage to develop new technology because of the perfect

knowledge and the ability to share all of the information.

 Lack of productdifferentiation because all of the products are the same and
they are not branded.

 Reducing the research and development process.