Perfect Competition

Published Oct 25, 2023

Definition of Perfect Competition

Perfect competition is a market structure in which there are many buyers and sellers, all selling identical products, and where no single buyer or seller has control over the market price. In a perfectly competitive market, all participants have access to perfect information about prices and products, and there are no barriers to entry or exit from the market.

Example

A common example of perfect competition is the agricultural market. Imagine a market where there are many farmers all growing the same type of crop, such as wheat. The wheat produced by each farmer is identical in quality and there are no differences in the production process.

In this market, there are many buyers looking to purchase wheat, such as bakeries and food manufacturers. These buyers have perfect information about the market price of wheat and can easily compare prices and quality among the different sellers. At the same time, there are many sellers, each with a small market share, so no single seller has the power to influence the market price.

Because of the large number of buyers and sellers, and the lack of market power, the price of wheat is determined by the forces of supply and demand, and there is no individual seller or buyer who can manipulate the price. Additionally, there are no barriers to entry or exit from the market, so new farmers can easily enter the market if they see potential for profit, and existing farmers can exit the market if they face losses.

Why Perfect Competition Matters

Perfect competition is often used as a benchmark or ideal market structure in economic theory. It is considered efficient because it leads to the lowest prices for consumers and the highest level of production. In a perfectly competitive market, resources are allocated optimally, as prices reflect the true costs and benefits of production. Additionally, because there are many buyers and sellers, there is competition to offer the best products and services at the lowest prices.

Perfect competition also serves as a useful reference point to evaluate the performance of real-world markets. By comparing the characteristics of a market to the conditions of perfect competition, economists and policymakers can identify areas where market imperfections exist and consider potential interventions to improve market outcomes.