Question

Why is Perfect Competition the “best” form of market structure? Does Perfect Competition exist? Describe the features of a perfectly competitive firm. Provide examples to support your views.

Answer 1

Perfect competition is the ideal form of market structure. Consumers benefit the most in this form of market as businesses provide the best to the consumers to stay in the competition. Both sellers and buyers have perfect knowledge. There is very less chance of exploitation of consumers by firms. The prices and the quality of goods supplied are competitive. Firms do not have monopolistic power. Its advantage to sellers is that there will be less advertisement cost as products are homogeneous. Prices are decided by the market structure, hence the sales happen automatically.

In the real world, perfect competition does not exist or seldom exists. The reason for this is that all products can not be homogeneous.

The features of a perfect competitive market are

Freedom of entry and exit

Large number of firms

Large number of buyers

Both buyers and sellers have perfect knowledge of the product

The products are homogeneous

Competitive prices

Little barriers to entry

The prices of products are decided by the market structure

Example: although perfect competition does not exist, the are market structure that are close to it. One example is bricks. There are many firms producing bricks but the prices and the quality don't vary much because there is competition. Other examples are bread, vegetable oil, bottled water etc.