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SS2: ECONOMICS - 2ND TERM

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Lesson 7, Topic 2
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Perfect Competitive Market / Perfect competition

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This is the type of market in which there are many buyers and sellers of a homogenous commodity, this is a market where buyers or sellers cannot influence the prices of goods and services (none can influence price i.e. both the buyers and sellers are price takers).  

The theory of a perfect market is based on assumptions some of which are

(a) The firm is able to alter its role of production and sales without having any significant effect on one of the products.

(b) An industry or any new firm is free to enter and go out of production.

Characteristics or Conditions for Perfect Competition

1. Large Number of Firms:

In the perfect competitive market there is a large number of firms each producing homogeneous or identical product.

2. Homogenous Product:

There are no brand names, no advertising or sales promotion, or any other factor that will differentiate between the products of various firms e.g. milk must be milk and not Dano, Peak, Hollandia, Cowbell, etc.

3. Individual Firms Have no Control Over Market Price:

Each firm, therefore, becomes a price taker since the invisible hand of demand and supply determines the price.

4. There is freedom of entry into the industry and freedom of exit from the industry:

New firms are free to enter the industry and the existing ones are free to leave the market.

5. Many buyers and sellers:

There are so many buyers and sellers such that no single buyer or seller can influence the price by increasing or reducing the quantity supplied. There is a uniform price for a commodity for all sellers. If a seller attempts to charge a higher price he will lose customers

6. No preferential treatment:

No preferential treatment exists, all buyers are treated the same

7. No transport cost incurred:

The products produced are portable (no transport cost) also there are no costs involved in the movement of factors of production.

8. Perfect knowledge:

Buyers must have complete information about the price ruling in the market and other market conditions.

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