Perfect competition is a market situation where there are infinite number of sellers that no one is big enough to have any appreciable influence over market price.
1. Large number of buyers and sellers
There are a large number of buyers and sellers in a perfect competitive market that neither a single buyer nor a single seller can influence the price. The price is determined by market forces namely the demand for and the supply of the product. There will be uniform price in the market. Sellers accept this price and adjust the quantity produced to maximise their profit. Thus the sellers inthe perfect competitive market are price- takers and quantity adjusters.
1. Homogeneous Product
The products produced by all the firms in the perfectly competitive market must be homogeneous and identical in all respects i.e. the products in the market are the same in quantity, size, taste, etc. The products of different firms are perfect substitutes and the cross-elasticity is infinite.
2. Perfect knowledge about market conditions
Both buyers and sellers are fully aware of the current price in the market. Therefore the buyer will not offer high price and the sellers will not accept a price less than the one prevailing in the market.
3. Free entry and Free exit
There must be complete freedom for the entry of new firms or the exit of the existing firms from the industry. When the existing firms are earning super-normal profits, new firms enter into the market. When there is loss in the industry, some firms leave the industry. The free entry and free exit are possible only in the long run. That is because the size of the plant cannot be changed in the short run.
4. Perfect mobility of factors of production
The factors of productions should be free to move from one use to another or from one industry to another easily to get better
remuneration. The assumption of perfect mobility of factors is essential to fulfil the first condition namely large number of producers in the market.
5. Absence of transport cost
In a perfectly competitive market, it is assumed that there are no transport costs. Under perfect competition, a commodity is sold at uniform price throughout the market. If transport cost is incurred, the firms nearer to the market will charge a low price than the firms far away. Hence it is assumed that there is no transport cost.
6. Absence of Government or artificial restrictions or collusions
There are no government controls or restrictions on supply, pricing etc. There is also no collusion among buyers or sellers. The price in the perfectly competitive market is free to change in response to changes in demand and supply conditions.