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Perfect Competition

A situation where there are many firms competing in the market, there is lot of competition and the firm producing the best quality goods and services at lowest price will be successful.

Characteristics of Perfect Competition

Homogeneous products

All firms produce the identical products.

Many buyers in the market

Though there are many buyers in the market they cannot control the prices. They are price takers. The prices are set through the price mechanism.

Many sellers in the market

There are many sellers in the market. There is no dominating firm. All firms are usually small and are price takers.

Perfect information

All buyers and sellers have perfect knowledge about the prices in the market.

Freedom of entry and exit

There are no barriers to entry and exit for firms. Firms are free to enter or exit the market at their discretion. If a firm is making profit other firms may enter the market tempted by the profits.

No preferential treatment

There is no preference given to any firm by government or anybody. All firms are equally treated.

Merits of Perfect Competition

  • There is optimal allocation of resources in the long run.
  • Maximum economic efficiency as no single firm can control prices. There is no wasteful excess capacity.
  • Advertising and promotional expenses are eliminated because product is homogeneous and there is perfect knowledge among the consumers.

Demerits of Perfect Competition

  • No Research and Development undertaken as the products are homogeneous.
  • Prices in perfect competition are controlled by the price mechanism. It may lead to instable income and prices due to frequent change in equilibrium prices.

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