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Perfectly Competitive Market

Introducing Market Structures

To the economist, the term “market” generally refers to the various arrangements people have for trading with one another. The type of market structure within which a firm operates is determined by essential features or characteristics of the market, including the number of firms involved, the extent to which the products of different firms are diverse or homogeneous, and the ease of entry into and exit from the market.

Perfectly Competitive Market

Basically, perfect competition refers to the market structure in which there are a large number of relatively small firms, each firm having the freedom of entry into and exit from the industry. All firms produce homogeneous products and all market participants (buyers and sellers) have full knowledge of the situation in the market, especially about the present price and location of the product.

Characteristics of a Perfectly Competitive Market

  1. A large number of Buyers and Sellers: There are many buyers and sellers in the market to the extent that no single buyer or seller can influence the product price. Thus, all buyers and sellers are described as price-takers.
  2. Homogeneous Product: The products of all firms must be identical in the eyes of the consumers. Hence, it makes no difference which firm they purchase from, and especially since no factor other than price will influence their purchasing decision.
  3. Perfect Mobility of Resources: There must be perfect mobility of factors of production so that firms can move freely into or out of the market (i.e. free entry and exit).
  4. Perfect Knowledge of all Relevant Information: All buyers and sellers must have adequate knowledge of existing market conditions. That is, the firms must know the technological conditions of production, the price of inputs and price at which the product can be sold, while all buyers must know where they can get the product to buy and at what price.

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