Perfect competition is a type of market where an infinitely large number of sellers offer customers the same products, have free access to the industry, use general price information and the same best technologies.
Let us examine in detail each part of this definition.
So, the conditions of perfect competition:
1) There should be a significant number of sellers and buyers of this product on the market. Under this condition, not a single buyer, and not a single seller, can alone influence the market equilibrium, that is, no one will have the corresponding power. All subjects are fully subordinate to the market element.
2) The sale of the same, standardized products. Examples of such a product: cereals or flour of the same class, sugar, etc. In such conditions, buyers will have no reason to prefer the products of a particular company - the quality is the same everywhere.
3) One seller cannot influence the market price, since there are a large number of firms producing the same product. Perfect competition implies that each individual seller will be forced to agree with the price dictated by the market.
4) There is no non- price competition , because the product is homogeneous in quality.
5) Consumers have access to pricing information. This means that if any manufacturer decides to solely raise the cost, then he will lose his customers.
6) Sellers are not able to conspire and raise prices, since there are too many of them in this market.
7) Perfect competition implies that any seller can enter and exit this market sector at any time, since there are no obstacles. A new company is created and closed without problems. It is assumed that the size is quite small firms, so you can sell the business at any time.
Perfect competition is a market in which individual sellers are not able to influence the market price by changing production volumes, since their share in the general market segment tends to zero. If the seller decides to reduce his production and sales volume, then the total market supply will change negligible. The seller is forced to sell his products at the prevailing price, the same for the entire market. The demand curve for his product changes elastically: if the seller sets the price above the market, then demand will fall to zero. And if you put the price below the market, then it will grow indefinitely, but such a price cannot be fixed because of production costs.
But elastic demand also does not mean that the seller will be able to infinitely increase output at a constant price. It can remain constant until changes in the production volume of a given seller do not affect the production of the industry as a whole.
Perfect competition is an ideal market model based on a theory that is not in real life. Indeed, goods from different manufacturers have their own differences, and barriers to entry and exit from the industry definitely exist.
In approximate form, perfect competition is presented in some agricultural markets, among small market traders, construction crews, photo shops, retail stalls, etc. They are all united by an approximate similarity of supply, a large number of competitors, an insignificantly small scale of business, the need to work at the prevailing price - that is, they reproduce many of the above conditions for perfect competition. Using their examples, it is very convenient to study the functioning, organization and logic of the actions of small firms using a generalized and simplified analysis. In Russia and the CIS countries, the situation in small business is very common, close to perfect competition.