Page 147 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 10.1 Features of Perfect Competition

The model of perfect competition is based on the following features:

1. Large numbers of sellers and buyers: The industry in perfect competition includes a large
number of firms (and buyers). Each individual firm, however large, supplies only a small

part of the total quantity offered in the market. The buyers are also numerous so that no
monopolistic power can affect the working of the market. Under these conditions each fi rm
alone cannot affect the price in the market by changing its output.
2. Product homogeneity: The technical characteristics of the product as well as the services
associated with its sale and delivery is identical. There is no way in which a buyer could

differentiate among the products of different firms. If the products were differentiated
the firm would have some discretion in setting its price. This is ruled out in perfect

competition.
The assumption of large number of sellers and of product homogeneity implies that the
individual firm in pure competition is a price-taker: its demand curve is infi nitely elastic,

indicating that the firm can sell any amount of output at the prevailing market price.
3. Free entry and exit of fi rms: There is no barrier to entry or exit from the industry. Entry
or exit may take time but fi rms have freedom of movement in and out of the industry. If

barriers exist, the number of firms in the industry may be reduced so that each one of them
may acquire power to affect the price in the market.

4. Profi t maximisation: The goal of all firms is profit maximisation. No other goals are

pursued.
5. No government regulation: There is no government intervention in the market (tariffs,
subsidies, rationing of production or demand and so on are ruled out).
Figure 10.1

The above assumptions are sufficient for the firm to be a price-taker and have an infi nitely

elastic demand curve. The market structure in which the above assumptions are fulfi lled
is called pure competition. It is different from perfect competition, which requires the
fulfilment of the following additional assumptions.

6. Perfect mobility of factors of production: The factors of production are free to move from
one firm to another throughout the economy. It is also assumed that workers can move

between different jobs. Finally, raw materials and other factors are not monopolised and
labour is not organised.

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