What are the characterstics of perfect compitition?

Answer 1

CharacteristicsThe four characteristics of perfect competition are: (1) large number of small firms, (2) identical products, (3) perfect resource mobility, and (4) perfect knowledge.

• Large Number of Small Firms: A perfectly competitive industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that no single firm can exert market control over price or quantity. If one firm decides to double its output or stop producing entirely, the market is unaffected. The price does not change and there is not discernible change in the quantity exchanged in the market.

• Identical Products: Each firm in a perfectly competitive market sells an identical product, what is often termed "homogeneous goods." The essential feature of this characteristic is not so much that the goods themselves are exactly, perfectly the same, but that buyers are unable to discern any difference. In particular, buyers cannot tell which firm produces a given product. There are no brand names or distinguishing features that differentiate products.

• Perfect Resource Mobility: Perfectly competitive firms are free to enter and exit an industry. They are not restricted by government rules and regulations, start-up cost, or other barriers to entry. While some firms incur high start-up cost or need government permits to enter an industry, this is not the case for perfectly competitive firms. Likewise, a perfectly competitive firm is not prevented from leaving an industry as is the case for government-regulated public utilities.

• Perfect Knowledge: In perfect competition, buyers are completely aware of sellers' prices, such that one firm cannot sell its good at a higher price than other firms. Each seller also has complete information about the prices charged by other sellers so they do not inadvertently charge less than the going market price. Perfect knowledge also extends to technology. All perfectly competitive firms have access to the same production techniques. No firm can produce its good faster, better, or cheaper because of special knowledge of information.