3. PERFECTLY COMPETITIVE
In perfect competition all firms are too small
to have any market power and so they will
act as "price-takers" and simply charge the
market price P1.
For an industry to be perfectly competitive, there must be freedom of
entry and exit, all firms must be price-takers, there must be perfect
information, and perfect mobility of factors and the products must be
There are significant obstacles preventing perfect competition from
appearing in today's economy. The agricultural industry probably
comes closest to exhibiting perfect competition because it
is characterized by many small producers with virtually no ability
to alter the selling price of their products. The commercial buyers of
agricultural commodities are generally very well informed
and, although agricultural production involves some barriers to
entry, it is not particularly difficult to enter the marketplace as a
Infinite buyers and sellers – Infinite consumers with the willingness and ability
to buy the product at a certain price, and infinite producers with the willingness
and ability to supply the product at a certain price.
Zero entry and exit barriers – It is relatively easy for a business to enter or exit
in a perfectly competitive market.
Perfect factor mobility - In the long run factors of production are perfectly
mobile allowing free long term adjustments to changing market conditions.
Perfect information - Prices and quality of products are assumed to be known to
all consumers and producers.
Zero transaction costs - Buyers and sellers incur no costs in making an
exchange (perfect mobility).
Profit maximization - Firms aim to sell where marginal costs meet marginal
revenue, where they generate the most profit.
Homogeneous products – The characteristics of any given market good or
service do not vary across suppliers.
Non-increasing returns to scale - Non-increasing returns to scale ensure that
there are sufficient firms in the industry
Optimal allocation of resources.
Competition encourages efficiency.
Consumers charged a lower price.
Responsive to consumer wishes: Change in
demand, leads extra supply
Insufficient profits for investment.
Lack of product variety.
Lack of competition over product design and
Unequal distribution of goods & income.