What is Perfect Competition?

Classical economists such as Adam Smith and Alfred Marshall, set up some market models on the basis of their observations. The perfect competition is one such model that has been propagated by most economists. In the pre-Depression era, this kind of economic model was considered to be the best and ideal condition for national and world economics alike.

There are examples where governments have made an effort to make this kind of economy come true. This economic model, though hypothetical is probably the best way to control the issues such as depression, inflation and also recession.

This model is also known as the ideal one due to the fact that, it does not put one person or group of person on a superior position, but distributes the available resources in the best possible manner to the people and the factors of production, that are involved in the process of production of goods.

As the name of the model itself depicts the fact that every possible thing in such a market is 'perfect'. The word 'perfect', basically implies that the participants of such market model are homogeneous. On one side are the buyers, who create the demand size, while on the other are the manufacturers or producers who supply, identical and homogeneous units.

Thus the market participants and movements on the demand and supply graph is almost robotic and uniform. Perfect competition is thus a situation, with homogeneous products, large number of sellers and consumers who have congruent demands which are placed at an equal interval of time.

Such a market situation is used to explain many different economic theories, especially the ones that are based upon the demand and supply analysis. The characteristics of perfect competition would prove to be helpful as a further explanation of the concept.

Again, let me remind you that this kind of market is probably the most difficult to achieve, and there is almost no practical example that I can offer to enlighten you.

There are several distinct characteristics of a perfect competition. The prominent ones have been explained below.

There are infinite buyers and sellers in such a market model. In reality, this is almost impossible, as there is a certain limit as to the number of sellers and also the buyers, who are present in the market. Such a hypothesis is never achieved. However, there are almost similar markets that have such characteristics.

For example, the market of common salt. Here, there are almost-infinite sources of salt on the supply side, while there is the ever-growing world population on the other side. This is the reason that the salt prices rarely fluctuates.

There are almost no entry and exit barriers present in such a market. Hence, any producer can freely enter the market, as there are infinite demand units. At the same time, he can also exit the market, as there are new players, who can substitute the supply.

According to the concept of the perfect competition, there is a hundred percent disclosure of facts from the buyers and sellers.

In such a type of competition, it is assumed that there is no cost of transportation. The geographical factors and physical distances, are also extinct. This is a rather weird feature, and there is no way that it can come true.

However, you may have observed that small-sized countries and states that have almost all possible factors of production, have stable economies, as they rarely rely on trade and factor mobility.

In such a situation, firms have only one motive in front of them, that is maximizing the profits. This is the reason why hundred percent capitalist economies in the imperial age and colonial era, performed really well, in terms of income and revenue. Profit maximization in perfect competition, however is a very difficult aspect.

This is a distinct feature of the economic model, that products are identical to each other. Let me cite the same example of milk. Homogeneous products mean that prices remain absolutely stable.

Economists still have some undecided debates such as perfect competition vs monopoly and which is better. The only comment that I can offer in such a case is, the economy and market model that keeps resources conserved and its consumers satisfied, is the best.