Perfect Competition

Conditions for Perfect Competition

• Perfect competition occurs in the market when the number of producers and sellers of
the product is very large.

• Buyers also can't affect the price or change the price.

• The goods produced by all the firms should be homogeneous i.e absolutely the same.

• All the buyers and sellers are aware of and have the knowledge of current price of the
product in the market.

• New firms can enter and also exit the industry

• Perfect mobility of factors of production so the that the production was start very
quickly
 Pricing under Perfect Competition
• Production of a particular good by a single firm is very small when
compared to the total production of the industry.

• Because of this the decrease or increase in production by single firm can

not significantly affect the total production of the goods produced in the
industry.

– If a particular firm reduces the production of the good ,other firms can increase
the production or new firms can enter the market to cater to the demand.

• As a result one particular seller or producer can't change or affect the

price of the good by increasing or decreasing the production.
 Pricing under Perfect Competition
• Every firm in the industry accepts the current
price of the market and it is taken as fixed.

• In order to maximize the profit the firm can

only change the quantity of production and
not the price.
 What is Homogeneous Product
• The goods produced by all the firms in the
industry should be absolutely the same.
• In other words these goods are perfect
substitutes.
• There is no differentiation among the products
produced by different firms, such as differences
in name branding labels and packaging.
• Essentially such goods can be called as
commodity.
Gaining Pricing Power in perfect competition

• Firms try to move away from perfect

competition and thereby gain control over
pricing by making little bit of differentiation in
the product through branding labelling
packaging etc.