Question

What are the necessary conditions for a perfectly competitive market to exist

Answer 1

For there to be a perfectly competitive market system there must be four features or requirements. The market needs to have many businesses, none of which is large in terms of their revenue. Second, companies should be able to easily enter and exit the market. Third, a non-differentiated or homogeneous commodity is produced and sold by each firm on the market. Fourth, all companies and consumers on the market have complete information on prices, quality of the product and production techniques.

A business operating in a market which is perfectly competitive will be a price-taker. A price-taker can't control the quality of the good they sell; they only take the market price as offered. The conditions which make a market perfectly competitive often cause firms to be price-takers in that market. When there are many firms, all of which produce and sell the same commodity using the same inputs and technologies, rivalry requires each firm to charge for its good the same market price. Because every company on the market sells the same, homogenous product, no single company can raise the price it charges above the price charged by the other companies on the market without losing business.