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Outline The Key Factors That Help Determine If a Perfect Competition Has Been Met

Referencing Styles : MLA | Pages : 1

Outline The Key Factors That Help Determine If a Perfect Competition Has Been Met.

In a competitive market, a single consumer or a single seller has no influence over the market price and therefore, has no role to play in the determination of price. Instead the price is determined in the competitive market through the interaction of market demand and market supply.

Price ( Rs. Per shirt)

Quantity demanded (thousand shirts per month)

Quantity supplied (thousand shirts per month)

Market position

Effect on price









Excess supply





Excess supply










Excess demand





Excess demand



This table places the demand schedule and supply schedule side by side against the same prices. Thus, it shows various quantities of shirts that consumers are willing to buy (col 2) at various prices (col 1) and the various quantities of shirts that the sellers are willing to sell (col 3) at those prices. Market demand is taken to be an inverse function of price. Meaning, when price of the goods fall, the demand of the goods rise. Market supply is directly related to price. Meaning, producers are willing to supply more at a higher price. These two propositions about demand and supply imply that lower the price of the shirt, fewer shirts are offered for sale and more shirts consumers want to buy. The higher the price , more shirts are offered for sale and few are demanded. This indicate that combined demand and supply schedules show the operation of law of demand and law of supply. There is only one price of the shirt i.e Rs.300 at which the quantity demanded and quantity supplied are equal to 45 thousand shirts. Therefore, the equilibrium price is Rs 300, and the equilibrium quantity is 45 thousand. All other prices are disequilibrium prices because quantity demanded does not equal quantity supplied at those prices. First consider the prices below Rs 300. At these prices the consumers are willing to purchase a larger quantity than the producers are willing to sell. Thus, at the price of Rs 100 per shirt, the buyers would be willing to buy  70 thousand shirts whereas suppliers would be willing to supply only 20 thousand shirts. Therefore, the quantity demanded exceeds the quantity supplied by 50 thousand shirts. The amount by which quantity demanded exceeds the quantity supplied is called excess demand.

Features of perfect competition are:

  1. Large number of buyers and sellers – there are large number of buyers and sellers of the commodity under perfect competition. Each are too small to exert any influence on the price of the commodity by his action. This means that under perfect competition, a firm produces such a small part of the total market output that a change in his output will have no noticeable effect on the market supply and hence the price of the commodity. It means that a firm under perfect competition cannot influence the market price by increasing or decreasing the quantity of output it produces. A firm is, therefore, a price – taker rather than a price – maker. Likewise, the number of buyers is so large that no single buyer can influence the market price by changing his demand for the commodity. An individual buyer buys such a small quantity of the total output of the product that any change in the quantity demanded by him has negligible impact on the total market demand and hence, no influence on the market price of the commodity.
  2. Homogeneous product – all the firms produce homogeneous or perfectly standardized commodity under perfect competition. The homogeneity of the product refers to the physical characteristics of the commodity like the colour, size, chemical components, and environmental factors like location of the seller, credit – facilities. It is important to note that it is the total conditions surrounding the sale of the product , which should be considered. A customer will be prepared to pay more for the product sold in more luxurious surroundings or by pleasant sales staff than otherwise. Therefore, homogeneity of the product implies both the physical characteristics of the product and the conditions surrounding the sale, i.e. environmental factors. The products of different firms under perfect competition are indistinguishable from one another, i.e. they are perfect substitutes for one another. This characteristic implies that a uniform price will rule throughout the market. No firm has any basis of charging higher price for its product. If one firm tries to raise the price of product above the market price , it would lose all its customers to other firms selling that product at the market price. Similarly, the buyer has no reason to express his preference for the product of one particular firm, and so he is indifferent to the firm from which he buyes.
  3. Freedom of entry and exit – this means that new firms are free to enter the industry and existing firms are free to leave the industry if they so desire. There is no restrictions , legal or social on the entry of new firms into and the exit of old firms from the industry. This ensures that all the firms end up earning only normal profits in the long run. If existing firms are earning super – normal profits, new firms would enter the industry and increase the total supply in the industry. This would reduce the market price and wipe out the super- normal profits. On the other hand, if existing firms are incurring losses, some of them would start leaving the industry, leading to decrease in supply and rise in the price  till the losses are wiped out.
  4. Perfect mobility of resources -  the resources are perfectly mobile. This characteristics ensures that resources or factors of production can enter or quit a firm or the industry at will. This characteristics implies that the resources are able to switch over from one use  to another without any restriction. This condition is essential to make the entry of the firms into and exit of the firms from the industry possible.
  5. Perfect knowledge – consumers, firms and resource owners under perfect competition have perfect knowledge about the market conditions. Each firms knows the price prevailing in the market and it would not sell the commodity at a price below the market price. Similarly, each buyer has perfect knowledge about the prevailing price and he is not prepared to pay higher prices than the price prevailing in the market. This characteristics of perfect knowledge would ensure that price differences are quickly eliminated and a single price for the commodity would ultimately prevail throughout the market. In the same way, firms have perfect knowledge about the available techniques of production. Each firm is, therefore, able to make use of the best available techniques of production. This implies that all firms have similar cost conditions leading to same per unit cost of production.
  6. Absence of transport costs – buyers and sellers incur no transport costs in purchasing and selling goods. Meaning, there is no transportation cost.

State some great examples that explain perfect competition in real-life scenarios. 

The agricultural markets are examples of perfect competition in real –life scenarios. There are many sellers of vegetables in the local market of the farmers. There are many farmers selling the same fruits, herbs and vegetables. All the prices are same.

The street food vendors have more or less same food items and they sell all the items at the same prices to the customers.

The computer software been sold at same prices at different shops.


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