The perfect competition is the structure of market in which there are large no. of buyers and sellers. They produce or sell homogenous product. In this market, firm is price taker and market is price maker because price of commodity is determined on the basis of market demand and supply. So, the price of particular commodity remains same everywhere in an economy.
Characteristics / Assumptions of perfect competition market:
Large no. of sellers and buyers:
In this market there is assumed large no. of buiyers and sellers. A buyer and seller in the very small part and seller cannot influence in the market price.
The products produced in the industry are supposed to be homogeneous. Different units of a commodity are similar in content, quality, price, smell, packaging, etc.
Free entry and exit of firm:
There is no barrier on entry of a new firm to the industry and there in no any restriction on exit of firm from the industry.
In this market, all firm wants to maximize its profit.
No government regulation:
Government doesn’t influence in this market. There is no licensing system, no tax and subsidy. Government has no role in this type of market.
Perfect mobility of factors of production:
There is assumed that factor of production are free to move from one place to other, one industry to other and one occupation into another.
It assumes that under perfect competition market buyers and sellers are aware about prevailing market prices. They are also aware of future market condition.
Price and Output determination under perfect competition market:
In the perfect competition market there is large no. of buyers and sellers. Price is determined by market forces and industry. It means market price is determined on the basis of market demand and market supply. The price determined by market/industry is accepted by all the firms. They just adjust their output according to the equilibrium position of firms. The process of price and output determination is explained by the help of given figures.
On the given figure, first of all price and output determination of industry is shown. In the first figure, demand and supply curves are interested at point E. That point determines the equilibrium price of industry i.e. OP and equilibrium price of output of industry i.e. OQ. Suppose, when the price increases from P to P2 then demand is P2K and supply is P2L, it means there is excess supply of goods. So, price tends to decline at OP. On the other hand, when price decreases from P to P1 there is excess demand equal to area MN. It tends to increase price OP so that equilibrium price of market price is OP. The market price is accelerated by all the firms but they are capable to adjust their output according to the equilibrium price of a firm. So, in short run, firm may obtain super normal profit or normal profit or loss.
The firm A, by producing equilibrium output i.e. OQ1 at OP price, the firm has been obtaining super normal profit. Firm B, by producing OQ2 output at OP has been obtaining normal profit. The firm C, by producing OQ3 output at OP price has been obtaining loss. But in the long run, every firm always obtains only the normal profit.