Question

Explain SEVEN (7) conditions necessary for a perfectly competitive market to exist. (7)

Answer 1

Conditions necessary for a perfectly competitive market to exist are :

1. There must be large numbers of buyers and sellers: There are large number of buyers and sellers under perfectly competitive market. Activity of a single seller in the market is not very significant in the market and since each buyer only buys a small quantity of the total amount, therefore his/her purchasing is also not significant in the market. Thus, each buyer and seller has no ability to influence the price by their independent action.

2. Products sold by the suppliers in the perfectly competitive market are homogeneous: The commodities sold by every supplier everywhere are the same. The products sold by various sellers are indistinguishable from each other. They are perfect substitutes for each other.

3.Under this type of market, the market prices of the products sold in the market is same. This can be attributed to the presence of the identical products in the market. No individual participant of the market has the power to decide the price or to influence the ongoing market prices, rather price is determined by all the active participants in the market.

4. In this type of market, there is no restiction on the entry and exit of the firms participating. Firms are only entitled to gain the normal profits, as the super normal profits in the market give rise to the entry of the new firms. At the so called normal profit, the market is in equilibrium and there is no tendency to leave or enter the market.

5. Under perfect competition both buyers and sellers have perfect knowledge about the conditions of the market. Every seller have information about price charged by other sellors. Similarly, buyers are aware of the prices charged by all the sellers in the market.

6. Various factors of production are perfectly mobile within the industry under perfect competition various. Factors of production can move from one occupation to another and also from one place to other. There is no barrier. Factors like labour moves from one place to other in search of higher wage. There should not be any kind of restriction on the mobility of resources.

7. There is a single unit price in the perfectly competitive market. Price chargey by the firms in the market is free of transportation cost i.e. Price does not include the cost of transportation of goods. The market price of goods does not differ due to location of different sellers in the market.

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