Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Thursday, 31 May 2012

Characteristics Perfect Competition Market

4.1       Perfect Competition Market

Perfect competition market is market in which there are a large number of buyers and sellers, buying and selling the homogenous products at certain price levels. Examples of products in perfect competition market are agricultural goods such as vegetable, fruits and others.


a.                  Large number of buyers
There are many buyers in the market but they cannot control prices. Price is fixed in the market through the forces of demand and supply. No matter how much has been purchased, price is always constants. Buyers are said to be price takers.

b.                  Many sellers in the market
There are many sellers in the market. Like the buyers they too cannot control price. They are also price takers. Usually the sellers are small firms. The action of one firm will affect to others firms. Example; if the seller offers a lower price, then he will incur a loss, and if he sells at a higher price, there will be no demand. In other words, he is powerless in determining price but he can set the quantity he wants to sell.

c.                   The product are homogenous
The goods are homogenous and not differentiated. They are identical. The consumer cannot differentiate whether the goods come from producer A or B or C. Advertising is totally absent in this market.

d.                  Free entry to and exit from the market
There must be free entry to and exit from the market. If the industry is making profits, then new firms will enter the market. Otherwise, some firms will leave the market. No restriction is imposed.

e.                  Perfect knowledge
Both the consumers and the producers have perfect knowledge about the market situation. They know the current prices in all markets.

f.                    Mobility of factors of production
There must be mobility of factors of production. This means that factors of production are mobile. There are no barriers to mobility. As for land, it must have alternative uses.

g.                  No transportation cost
There must be no transportation cost. It is assumed that all firms are situated close to one another and are very close to the market.

h.                  Independence in decision making
There will be no external forces that will influence the decision of buyers and seller. They make their own decisions.