11 CHARACTERISTICS OF A PERFECT COMPETITIVE MARKET

Perfect competition is a market structure where there are many buyers and sellers of homogenous goods.

The following are eleven characteristics of perfect competition:

Characteristics #1: Many Buyers and Many Sellers

In a perfectly competitive market, many buyers and sellers have perfect knowledge of the prevailing market conditions.

By perfect knowledge, we mean buyers and sellers are well informed of the price charged, the production and so on.

Characteristics #2: None Buyer or seller can influence the market price

There are many buyers and sellers in perfect competition such that no buyer/seller can affect the market demand/ market supply.

It is also assumed that each buyer and each seller act independently of other buyers and sellers.

Characteristics #3: Firms are price takers

Of the four main market structures, perfect competition is the only one where firms are price takers.

A perfect competitor is a price taker because it lacks market power to control prices.

This is because no firm is large enough to use supply to control prices. 

If a perfect competitor tries to raise its price above the prevailing market price, it will likely lose all of its sales to competitors because consumers view the goods as perfect substitutes.

Characteristics #4: Price is set by the forces of demand and supply

The prevailing market price in a perfectly competitive market is the equilibrium price set by the forces of demand and supply..

Every firm in a perfectly competitive market is expected to sell at the market prevailing price.

Characteristics #5: Each firm faces a perfectly elastic demand.

The demand curve faced by a perfectly competitive firm is perfectly elastic because it will lose a large number of its customer to competitors if it raises prices above market equilibrium.

Since perfect elastic demand is represented by a horizontal straight line, it follows that the demand curve of a perfectly competitive firm is represented as a horizontal straight line.

Characteristics #6: Homogenous goods

Goods sold in perfect competition are identical in the eyes of the consumer.

Because they are identical, it follows that the consumer can easily substitute them, implying that goods in a perfectly competitive market are perfect substitutes.

Characteristics #7: P=MR=AR

A perfectly competitive firm's marginal revenue is equal to its average revenue, which is equal to its price.

This is because the price a perfectly competitive firm receive is more or less fixed so that the additional revenue from selling a unit of a good is the price received from that unit.

Characteristics #8: Freedom of entry and exit.

Firms can easily enter and depart a perfectly competitive market as there are no barriers to entry or exit.

The absence of barriers to entry ensures that a perfectly competitive firm does not earn economic profit in the long-run.

Characteristics #9: Allocatively efficient

Allocative efficiency means producing the goods most wanted by society such that price equals marginal cost.

Given that price equals marginal cost and that perfect competitive firm produce at the point where marginal revenue equals marginal cost, it follows that perfectly competitive firms are allocatively efficient in the long run.

READ ALSO: PERFECT COMPETITION VS MONOPOLY VS MONOPOLISTIC COMPETITION VS OLIGOPOLY

Characteristics #10: Cannot earn economic profit in the long run.

Perfect competitive firms can not earn economic profit in the long run due to the existence of freedom of entry and exit.

If firms are making a profit in the short run, more firms will enter the market.

This will increase market supply, which will, in turn, reduce price and decrease profit until it becomes zero.

By the same logic, if firms are suffering losses, more firms will leave the market and this will increase profit until economic losses are eliminated. 

Therefore, economic profit is not a feature of a perfectly competitive firm in the long run.

The best a perfectly competitive firm can do is to break even. 

Characteristics #11: Productively efficient

In its simplest term, productive efficiency means producing without wasting.

It is the point where price equals the average cost.

Given that a perfect competitive break-even, in the long run, it follows that perfectly competitive firms are productive and efficient.

Perfect competitive firms are productive and efficient because they produce where total revenue equals total cost (breakeven) in the long run.

Since total revenue is price times quantity and the total cost is price times average cost, it follows that price equals average cost In the long run — A necessary condition for productive efficiency.

To conclude, a perfectly competitive market is a market structure characterized by many buyers and sellers, price-taking firms who have no control over the market price and whose demand is perfectly elastic.

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