The following points highlight the eight main characteristics of a perfect competition. The characteristics are: 1. A Large Number of Buyers and Sellers 2. An Identical or a Homogeneous Product 3. No Individual Control Over the Market Supply and Price 4. No Buyers’ Preferences 5. Perfect Knowledge 6. Perfect Mobility of Factors 7. Free Entry and Free Exit of Firms and few others.
Characteristic # 1. A Large Number of Buyers and Sellers:
Under perfect competition there are a large number of buyers and sellers of a commodity. The numbers of buyers are so many that a single buyer buys a very small part of the market supply. Similarly, a single seller supplies a very small part of the total output. For this reason, the size of a competitive firm becomes very small in relation to the industry to which it belongs.
Characteristic # 2. An Identical or a Homogeneous Product:
All the sellers in a perfectly competitive market supply an identical product. In other words, the products of all the competitive firms are the same.
Characteristic # 3. No Individual Control Over the Market Supply and Price:
As many sellers are selling an identical product, a single firm supplies a negligible or an insignificant portion of the industry. For this reason, it has no control over market supply and market price. In other words, a single firm cannot bring about an appreciable change in total supply through the variation in its own supply. As a result it cannot influence the market price through its own independent action.
For this reason, a competitive firm is described as “a price-taker, not a price-maker”, and it has to sell all the units of its own output at the prevailing market price. From this it follows that the demand curve or the average revenue curve of a competitive firm becomes a horizontal line. As the price remains the same for all units of output, its marginal revenue curve becomes identical with the average revenue curve.
Characteristic # 4. No Buyers’ Preferences:
In a perfectly competitive market there is no preference of buyers for the product of any particular seller. As the products of all the sellers are identical, buyers can buy the product from any of them.
Characteristic # 5. Perfect Knowledge:
Again, both buyers and sellers have a perfect or full knowledge relating to the price prevailing in the market. For this reason, there can exist only one price in a perfectly competitive product market.
Characteristic # 6. Perfect Mobility of Factors:
The factors of production like labour or capital can freely move into the industry or freely go out of the industry. This is necessary to keep a proper balance between demand and supply of a commodity.
Characteristic # 7. Free Entry and Free Exit of Firms:
In this type of market new firm can freely enter the industry or an existing firm can freely leave the industry in the long run.
Characteristic # 8. Absence of Transport Cost and a Close Contact between Buyers and Sellers:
A market becomes perfectly competitive when both buyers and sellers stay at the same place so that there is a close contact between them. Because of this, neither buyers nor sellers have to bear any transport cost. If the same price is to prevail in all parts of the market, it is necessary that there is no transport cost. In the presence of any transport cost, prices will differ in the different segments of the same market.
It may be noted that these conditions of a perfect market are rarely found in reality. For this reason, perfect or pure competition is unreal. The markets of a few agricultural products (e.g., paddy, wheat, oilseeds, etc.) and of mining products (e.g., iron ore, coal, etc.) are to a large extent perfectly competitive. The other examples of such markets are the stock exchange and the Foreign exchange market.