Monday, May 19, 2014

Perfect Competion and Its Features

Perfect competition refers to ‘Market in which no participant can influence prices, it is characterized by free flow of information, no barrier to entry or exit & there should be large number of buyer and seller’.  But in reality perfect competition is very rare and may not even exist.
The definition of perfect competition which underlines the conclusion that perfectly competitive economy is Pareto efficient. Under these conditions the price of goods produced equals to marginal cost & all goods will be produced in least costly way. So, some economists have therefore argued that the goal of competition policy should not be perfect competition.  The major drawback to use of perfect competition is policy goal is that it is not clear that perfect competition is desirable unless it can be achieved in all market.
Features: Perfect competition is a market situation wherein the following conditions are present
1.       Large Number of buyer and large number of seller: In perfect competition there are large number of buyer & large number of seller. Due to this there is free competition among then to buy and sell goods. There is single price of a commodity. This price is accepted by every buyer and every seller. No single seller or buyer influence this price. Everyone is a price taker.

2.       Free entry- Free exit: In perfect competition there is free entry & free exit. It means ‘Any person who want to enter into competition or interested to leave competition should be allowed to do so. There should not be any political, economical, social, technological barrier on the path of new entry.

3.       Homogeneous product: It is important characteristic because in perfect competition all products must be homogeneous. It means they should similar in respect of shape, size, color, weight, design, etc…

4.       Perfect knowledge about market condition : In perfect competition buyer & seller both should have perfect knowledge about market conditions. They must have knowledge about different seller & the prices they are charging. It is also necessary for buyer to stop their own exploitation.

5.       Perfect mobility of factors of production: All factor of production should be perfectly mobile. It means producer should be free to use the factor in any manner as they desire.

6.       No Transportation cost : Cost incurred for carrying goods from the place of production to the place of consumption is called as ‘Transportation cost’. It defers from producer to producer. To have uniform price transport cost should not be added in the price of commodity.

7.       No Government intervention : In perfect competition government play passive role. Government should not be interfering with any decision of producer or consumer. It should not introduce any tax or policies or concession at market.