For Perfect Competition to exist among firms in a particular market, the following conditions are essential:
A perfectly competitive market is marked by the presence of a large number of sellers or firms. The number of sellers or firms should be so large that output of each firm producing at the minimum point of its long- run average cost curve is only a small fraction of the total output of the industry. The implication of this condition of large numbers is that no firm can influence the market price by changes in its output because output of each firm is only a very small fraction of the total market supply. Thus presence of a large number of firms is an essential condition for the market to be perfect. For the same reasons, the number of buyers should also be large in such a market so that no one can influence the market price with his large purchases.
The firms in a perfectly competitive market are supposed to sell completely homogeneous products. The units of a commodity being sold by a firm X should be absolutely similar in all respects to the units of the commodity by the firm Y. there should be no differentiation of products by sellers by way of quantity, shape, size, colour, design, packing, etc. in this situation, buyers will have no basis of being attached to one seller or the other, nor would they purchase the product at any other price than the one determined by the forces of demand and supply for the entire market.
Under perfect competition there is absolutely no restriction no the entry of firms in industry. If a new firm wants to come in the industry, it can do so whenever it wants. This condition is essential to the concept of perfect competition because unless there is free entry of firms into the industry, existence of a large number of firms cannot be guaranteed. Similarly, there is freedom of exit. This means that the old firms can leave the market if they so desire. Thus, in the short period, the number of firms remains constant as no one can come in and no one can go out. But in the long period, the firms can come and go, i.e. have unrestricted entry or exit.
The firm can sell as much as it likes at that price. Thus, the firm takes the price as given and adjusts its output to that price. The firm is thus a price taker; it takes the price as determined by the industry.
In a perfectly competitive market both the buyers as well as the sellers of a particular product should have complete knowledge of the characteristics of the product and the price at which the product is bought and sold. This will ensure that the same price prevails all over the market for a product.
Another condition for a market to be perfectly competitive is that the factors of production are perfectly mobile; they are free to move from one occupation to another without any kind of difficulty. If the factor resources are not mobile or if they can move only with difficulty, each firm will have to pay a higher price for them than its rivals. This will cause a difference in the cost of production between one firm and another and hence in price.
Perfect competition also implies absence of transport costs. All firms have equal access to the market. No seller is nearer than the others to the buyers of the product. Unless transportation of the product has no cost at all or has equal cost for all of them, prices will differ from to firm in the industry depending on the location of a particular firm in the market.
Thus, a perfectly competitive market functions under conditions which ensures same price of the product for all the buyers and sellers. An individual buyer or seller is just too small and unimportant to affect the market price.
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