Perfectly Competitive Market |
When you hear “perfectly competitive” market you can probably already get an idea for what a perfectly competitive market is, but what are the ideal conditions for a perfectly competitive market? There are five main conditions in a perfectly competitive market, they include:
1. There are many buyers and sellers in the market, each of which is small relative to the market – the importance of this is that no one buyer or seller is operating in a major economy of scale, basically meaning that there operating at costs near what a new entrée competitor costs would be and not at a large scale production that would allow them certain operating cost benefits that come with operating at a large scale.
2. Each firm in the market produces a homogeneous (identical) product – no company should produce a superior or inferior item, an example would be bottled water since all water has two hydrogen atoms covalently bonded to a single oxygen atom there is no “superior water” – an extreme example but coffee and light American beer can also be good examples since the products vary ever slightly
3. Buyers and sellers have perfect information – there is no question of quality and the price of an item, another example using water, we all know that water is a very cheap product to produce and that it needs to be clean and taste pure so there’s no question when we go to the market how much we should pay for water and what kind of whatever we expect to receive.
4. There are no transaction costs
5. There is free entry into and exit from the market – this simply implies that additional firms can enter the market if the economic profits are being earned, and firms are free to leave the market if they are sustaining losses.
All these features would make a perfectly competitive market, one in which if a firm decided to charge a slightly higher price than other firms, consumers would not shop at that firm but instead would purchase from a firm charging a lower price. This is important to know for any business because determining whether your product or service is in a perfectly competitive market will reflect your ability to raise prices freely.
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