The following points highlight the four important features of perfect competition:
(a) According to the standard definition in perfect competition, there are a large number of sellers and buyers of the product, but they are individually too small in relation to the market to be able to affect the price of the product by their own actions.
This means that a change in the output of a single firm will not perceptibly affect the market price of the product. Similarly, each buyer of the product is too small to be able to extract from the seller such things quantity discounts and special credit terms.
(b) The product of each firm in the market is homogeneous, identical or perfectly standardised. An example of this might be Grade A winter wheat. As a result buyers cannot distinguish the output of one firm from that of another, and so are indifferent as to the particular firm from which they buy. This refers not only to the physical characteristics of the product but also to the “environment” (such as the pleasantness of the seller, selling location, etc.) in which the purchase is made.
(c) There is perfect mobility of resources. That is, workers and other inputs can easily move geographically from one job to another, and respond very quickly to monetary incentives. No input required in the production of the product is monopolised by its owners or producers.
In the long run, firms can enter or leave the industry without much difficulty. That is, there are no patents or copyrights, “vast amounts” of capital are not required to enter the industry, and already established firms do not have any long-lasting cost advantage over new entrants because of experience or size.
(d) Consumers, resource owners and firms in the market have perfect knowledge of present and future prices, costs and economic opportunity in general. Thus, consumers will not pay a higher price than necessary for the product. Price differences are quickly eliminated, and a single price prevails throughout the market for the product. Resources are sold to the highest bidder. With perfect knowledge of present and future prices and costs, producers know exactly how much to produce.