What is Perfect Competition?

//What is Perfect Competition?
What is Perfect Competition? 2017-10-09T05:17:01+00:00

Definition: Perfect competition is an economic condition where all companies in an industry are on a level playing field and none have an advantage or can exercise pricing power over consumers. This economic state only exists if all companies are price takers, sell identical goods, have relatively small market share, and purchasers know all they can know about each product.

What Does Perfect Competition Mean?

What is the definition of perfect competition? Perfect competition is mainly used by economists and theorists in order to portray a state of equal competition between producers. No single producer has any advantage, since they all produce the same product for consumers. In this market, producers will produce the exact number of goods at the ideal market price in order to meet 100% of the consumers’ demands.

Let’s look at an example.

Example

The Pencil Company is in the business of producing yellow #2 pencils. The product they produce is not unique and is produced and sold by thousands of other companies in the market. Since they produce the same good as many other firms, they cannot influence the price. Instead, consumers and producers interact at the market price where supplyfrom the firms equals the demand from the consumers. Thus, The Pencil Company sells each item for $1, no more and no less.

However, Matthew, the CEO of The Pencil Company, wants to increase profits by increasing the price of their pencils. He mandates that the company sell its pencils for $1.01. Remember, all of its competitors are selling the pencil for $1. Due to perfectly competitive market, and the fact that all the pencils are the same, Matthew’s plan backfires. The Pencil Company sells zero pencils that year, because consumers see no reason that they should buy The Pencil Company’s goods for $1.01 when they can get the exact same good for $1.00 from hundreds of other companies. The Pencil Company goes bankrupt and the power of pure competition is shown.

Summary Definition

Define Perfect Competition: A perfectly completive market means is an industry where numerous firms operate and cannot control or influence price, demand, or supply of their product.