In a perfectly competitive market, all producers sell the same goods or services. A single seller or buyer cannot influence the price – it is established by balancing supply and demand. In a market of pure competition, there are no restrictions on entry and exit.
Perfect competition was considered the basis of the market by Adam Smith, one of the creators of economic theory. Smith believed that buyers and sellers are guided to balance by the “invisible hand of the market”: if left unhindered, it will ensure the most efficient use of resources and fair prices.
However, later on, scientists proved that this is not always the case: for example, market monopolization may occur over time. Modern economists believe that perfect competition is an ideal model, which exists only in theory. Some markets, however, are approaching it: for example, the stock exchange, where many sellers trade the same securities. In such markets, this model allows predicting the behavior of buyers and sellers quite accurately.
Characteristics of a perfectly competitive market:
- Plenty of equal sellers and buyers.
- Uniformity of products. Goods or services are identical and interchangeable.
- No barriers to entry or exit from the market.
- High mobility of factors of production. Resources can be instantly redirected to other needs.
- Equal and full access for all participants to information: prices, supply and demand, competitors.
The criterion of competitive market efficiency is equality of prices and marginal costs.
When at least one of these features is absent, the competition is called imperfect.