CHARACTERISTICS OF PERFECT COMPETITION
1.Firms are small and plenty in number: - In perfect competition there are a large number of firms in the market. Each of them is very small as compared to the whole industry. Individually, none of them is even near to fulfilling the demand of the whole industry.
2.Homogenous products: - All firms produce/provide identical products/services. Thus it makes no difference to the buyer which seller's product he buys.
3.Perfect information: - All sellers and buyers know the prices at which all the transactions take place and what the possible alternatives are. Information costs are zero.
4. Demand is perfectly elastic and the firm is price taker: - Since the companies individually produce a very small percentage of the total industry output, they have no influence on the market price. They can only accept the prevailing market price. Figure A below shows the firm as a price-taker and fig B shows the demand and supply of the industry.
Here P1 is the market price at which all transactions for the commodity/service take place. The demand curve for individual firms is perfectly elastic. At market price the firm can sell as much as it produces (q1, q2 or any output). But if the firm charges a rate higher than the market price its customers will shift to competitor's product and the firm will sell nothing. If the firm charges a price below P1 its price will not cover its costs and will thus incur losses.
5.No barriers to entry: - There are no barriers for entry to the industry. Any firm can enter the market and the present sellers can't stop that firm from entering.
6.No supernormal profits: - In long run no firm can earn supernormal profit as illustrated in...