The Six Characteristics Of “Perfect Competition”
What is Perfect Competition?
The perfect ending is an economic theory to describe a market with the following characteristics:
- There are a large number of companies in the market.
- Market companies sell an identical product
- Companies take the prices
- Each company has a small share of the total market
- Buyers have full product information.
- There are no barriers for companies to enter and exit the market
There are a Large Number of Companies in the market that sell the Same Product
In a perfectly competitive market, many companies sell the same product. If companies were to sell cars in a perfectly competitive market, all companies would sell a red vehicle with four doors and a 120 horsepower engine.
Firms Have A Small Market Share And Are Price Takers
Since many companies in the market sell the same product, which means that each company has a very small share of the total market and therefore cannot fix the price, they sell their product. The price at which each company sells its product is the same and remains determined by supply and demand.
Since companies take their prices from the market, they are called “price takers” rather than “price fixers.”
Many price-taking firms without significant market share highlight the fact that a perfectly competitive market is the exact opposite of a monopoly in which there is one firm in the market with a market share of 100. % and, therefore, you can set the price. You want to sell your product.
Buyers Have Complete Information About The Product The Companies Are Selling
It means consumers know-how products remain made, understand all of the characteristics of the product’s existence sold, and how much competitors are selling their product.
A business in a perfectly competitive market cannot make false claims about the benefits of its product because the consumer would know that he is lying.
Weight loss teas sold on Instagram would not remain an example of a competitive market.
There are no Barriers for Companies to Enter and Exit the Market
Barriers to entering a market make it difficult for a new business to enter the market. The most common obstacles to entering a market include:
- Government regulations. In some needs, such as utilities, the government will regulate the number of companies entering a market.
- Patents If a company has a patent on a product, it can prevent other companies from entering the market.
- Start-up costs. Some industries have such high capital and start-up requirements that they constitute a barrier to entry. Setting up a bank or an insurance company requires significant capital, which means that a very limited number of companies will enter these markets.
A perfectly competitive market has no barriers to entering or leaving the market.
Perfect Competition Doesn’t exist in Real Life
There is no such thing in place of a perfectly competitive market in the real world. The perfectly competitive market theory is often used as a benchmark to measure the competitiveness of a market.
Some markets, like agriculture, are close to perfect Competition.
- There are over 2.2 million farms in the United States.
- Farms are price takers. No farm can influence commodity prices
- Although the farms do not sell an “identical” product, a farmer who grows corn produces corn similar to other farmers.
- While there are high start-up costs to starting a farm, government loans and programs can help cover some start-up costs.
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