Discuss the conditions that define perfect competition

Answer 1

There are four conditions which define a perfectly competitive market.

1 . There are many sellers, all of whom are price-takers. No seller is large enough to affect
market price by its own actions.
2 . Each seller produces a good or service that is perfectly interchangeable with the output
of any other; in other words, the product is homogeneous.
3 . Firms are not restricted from entering or leaving the industry in response to profits
or losses.
4 . There are no important transaction costs. In particular, information is available to all
participants at no cost. Without cost, buyers can learn the asking prices of sellers
and sellers can compare the bids of buyers.

Economic terminology differs from everyday use of the term "competition.". The preceding four assumptions rule out many activities usually called competitive. No seller needs to discount price to attract buyers, because each can sell its entire output at a market price everyone knows. Producers in many markets compete by differentiating their product designs or the quality of service they offer, but the assumption of homogeneous products rules out this type of competition. If information is costless there is no reason for advertising or other promotions. Some of the most common forms of competition are ruled out of a model called "perfectly competitive," for reasons buried in the history of economics. The perfectly competitive model is one of our most important analytical tools. An important use of this model is that the perfectly competitive market is a standard for analyzing consumer and producer benefits.