Semester-IV SYBA Subject: Theory of Distribution and welfare economics Module: 1

Topic: Perfect Competition, concept and characteristics

Notes By: Shubham K.

Concept of Market: market, a means by which the exchange of goods and services takes place as
a result of buyers and sellers being in contact with one another, either directly or through
mediating agents or institutions.
Markets in the most literal and immediate sense are places in which things are bought and sold.
In the modern industrial system, however, the market is not a place; it has expanded to include the
whole geographical area in which sellers compete with each other for customers.

Perfect Competition:
Perfect competition, as the name implies, is the purest form of competition. The following
characteristics must be satisfied for a market to be perfectly competitive:

1. The things that are sold must be uniform. In other words, they must be identical.

2. There can't be any preferences among the sellers. Customers should not be concerned about the
merchant from which they get their goods.

3. No one should be able to influence the market price. That is to say, neither buyers or sellers
have any market strength and are hence price takers.

Example of Perfect Competition

Consider a vegetable market where all of the vendors offer the homogeneous products. And sell
them at the same price, their products have little diversity.

Advantages of Perfect competition:

1. First and foremost advantage of perfect competition is that chances of consumer exploitation
are very low in case of this type of market structure because in perfect competition sellers do not
have any monopoly pricing power and hence they cannot influence the price of the product or
charge higher than the normal price from consumers.
2. Another advantage of perfect competition is that consumer get standardized product irrespective
of the place of purchase of product, so for example if a consumer is living in city A and he or she
travels to city B and he or she requires soap which normally has perfect competition then
consumer does not have to worry about quality of product because product will remain same
whether consumer purchase it from city A or city B.

3. Perfect competition is consumer-oriented market implying that consumer is king in case of this
type of market structure and sellers cannot displease the consumer because consumer will quickly
shift from one seller to another, hence as far as consumers are concerned perfect competition
market structure gives them pleasure of shifting from one seller to another if they are not satisfied
from the product or sellers services.

4. Another advantage of perfect competition is that it has very little or no advertisement expense
because products are homogeneous and if the firm keeps the price as decided by market forces
then sales will automatically happen without the company incurring huge publicity and
advertisement expense.

Disadvantages of Perfect Competition:

1. The disadvantage of perfect competition is that there are very few barriers to entry implying
that any firm can enter the market and start selling the product, hence old firms cannot afford to be
complacent because chances of losing market share to new firms always loom over them.

2. In the case of perfect competition, a firm which has the best location is likely to generate more
sales then a firm which is not located on prime location and hence location playing its part rather
than customer service of the seller or product features is a limitation in perfect competition.