Perfect Competition

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DEFINITION of 'Perfect Competition'

A market structure in which the following five criteria are met:1) All firms sell an identical product;2) All firms are price takers - they cannot control the market price of their product;3) All firms have a relatively small market share;4) Buyers have complete information about the product being sold and the prices charged by each firm; and5) The industry is characterized by freedom of entry and exit.Perfect competition is sometimes referred to as "pure competition". 

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BREAKING DOWN 'Perfect Competition'

Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other, real-life market structures are compared. The industry that most closely resembles perfect competition in real life is agriculture.

Perfect competition is the opposite of a monopoly, in which only a single firm supplies a particular good or service, and that firm can charge whatever price it wants because consumers have no alternatives and it is difficult for would-be competitors to enter the marketplace. Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they wish to buy becomes too expensive or its quality begins to fall short. New firms can easily enter the market, generating additional competition. Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.

Real-world competition differs from the textbook model of perfect competition in many ways. Real companies try to make their products different from those of their competitors. They advertise to try to gain market share. They cut prices to try to take customers away from other firms. They raise prices in the hope of increasing profits. And some firms are large enough to affect market prices. But the perfect competition model is not an ideal that we should try to achieve in the real world.

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  1. What parameters are required for a market to exhibit perfect competition?

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    From a microeconomics perspective, competition can be influenced by five basic factors: product features, the number of sellers, ... Read Full Answer >>
  3. What is the difference between a monopolistic market and perfect competition?

    A monopolistic market and a perfectly competitive market are two market structures that have several key distinctions, such ... Read Full Answer >>
  4. What is the difference between perfect and imperfect competition?

    Perfect competition is a microeconomics concept that describes a market structure controlled entirely by market forces. In ... Read Full Answer >>
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    An entrepreneur acts as a coordinating agent in a capitalist economy. This coordination takes the form of resources being ... Read Full Answer >>
  6. Are perfect competition models in economics useful?

    Perfect competition is the name used for a set of false assumptions of mainstream economists in models that, without those ... Read Full Answer >>
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  8. What are the major differences between a monopoly and an oligopoly?

    A monopoly and an oligopoly are economic market structures where there is imperfect competition in the market. A monopoly ... Read Full Answer >>
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