Characteristics

• What are the characteristics of perfect competition?


  • Large number of sellers
  • Homogeneous of identical products
  • Perfect information
  • Free entry and exit
  • Price takers
  • Zero long-run economic profit
  • Perfect mobility of resources
  • Non-collusive behaviour
  • Perfectly elastic demand
• How is ‘large number of sellers’ a characteristic of perfect competition?


  In a perfectly competitive market, there are many sellers, each of who is too small to influence the market price though their individual actions.
• How is ‘homogeneous or identical products’ a characteristic of perfect competition?


  Firms in perfect competition produce identical or homogenous products that are perfect substitutes for each other. Consumers perceive no difference between the products of different sellers.
• How is ‘perfect information’ a characteristic of perfect competition?


  Both buyers and sellers have access to perfect and complete information about the market, including prices, product quality, and production techniques. This ensures transparency and prevents information asymmetry.
• How is ’free entry and exit’ a characteristic of perfect competition?

  Firm can enter or exit the market without any barriers. There are no significant obstacles such as high entry costs or government regulations that prevent firms from entering or leaving the industry.
• How is ‘price takers’ a characteristic of perfect competition?


  Individual firms in perfect competition are price takers, meaning they cannot influence the market price. They must accept the prevailing market price as given and adjust their production accordingly.
• How is ‘zero long-run economic profit’ a characteristic of perfect competition?


  In the long-run, firms in perfect competition earn zero economic profit. Economic profit is just enough to cover all costs, including opportunity costs of capital.
• How is perfect mobility of resources’ a characteristic of perfect competition?


  Resources, including labour and capital, can easily move in and out of different firms or industries without restrictions, ensuring efficient allocation.
• How is ’non-collusive behaviour‘ a characteristic of perfect competition?


  Firms do not engage in collusion or corporative behaviour. They compete vigorously against each other.
• How is ‘perfectly elastic demand’ a characteristic of perfect competition?


  All products are identical so consumers rely on price to determine what firm they buy from.