Theory of perfect competition, Microeconomics

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Perfect competition has the following characteristics:

1. Large number of firms - There are a large number of firms in the market. Due to this each firm produces a very small fraction of the industry output. This is turn implies that a single firm cannot affect the market prices.

2. Identical products - All the firms in market produce and sell an identical product. The consumers cannot differentiate between the product of one firm and that of another.

3. Free entry and exit - New firms attracted by profit are free to enter the market while the existing ones suffering from losses are free to leave. Firms entering the market increase the supply of the good and reduce profit margins. Free exit reduces market supply and increases profit margins.

4. Perfect information - All firms are fully informed about the prices and costs of their rival firms. Buyers have full information about prices and other relevant factors.


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