What is perfect competition
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Features of perfect competition
A large number of participants (sellers and buyers).
Standardization of goods. This leads to russian business email list consumers viewing goods as absolutely identical and without differences.
Free access of participants to the market and the opportunity to leave it.
Everyone has full information about prices, product quality, supply and demand. This enables them to make informed decisions, aiming to increase profits.
Minimal intervention by the state or other regulatory bodies. This ensures equal conditions for all participants and promotes competition.
However, it is worth considering that in the real economy all these conditions rarely exist together.
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In perfect competition, demand and prices for goods are determined by the interaction between supply and demand in the market. In this model, no single seller has the ability to influence prices. Demand for goods and services depends on the preferences and needs of buyers, who make purchasing decisions based on price and personal preferences. Individual sellers form the supply. In other words, each company sets the price for its goods/services.
Equilibrium is achieved when supply in a perfectly competitive market is equal to demand. In this case, the price is at a level at which the quantity of goods available for sale corresponds to the amount that buyers are willing to take. This state of affairs is defined as the equilibrium or market value.
The essence of perfect competition is that sellers cannot set prices arbitrarily. Products are standardized and the level of competition among traders is very high. Consequently, prices remain flexible and can change in response to the dynamics of supply and demand.
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Characteristics of perfect competition
Let us list the features of perfect competition.
A vast and homogeneous market
It has a significant number of both buyers and sellers. The latter are small companies that lack the ability to control prices by regulating production volumes. They offer products with minimal differences in characteristics, functions, and prices. As a result, buyers cannot distinguish products based on physical parameters (size, color, etc.) or intangible values (e.g. branding).
The large number of buyers and sellers ensures the stability of supply and demand in this market. This means that the former can easily replace the goods of one manufacturer with similar products from another.
Transparency and accessibility of information
Understanding the mechanisms of component sourcing and pricing from suppliers can make or break a market for a particular company. Thus, the availability of information is a useful opportunity for market participants.
In knowledge-based and research-based industries (e.g. pharmaceuticals and technology), information about competitors’ patents and research helps to create competitive strategies and provides additional guarantees of product quality. Each company can produce goods/services with the same efficiency and using the same technologies as others. This helps to establish a level playing field and stimulates competition.
Lack of regulators
This is another sign of perfect competition. State control allows for the formation of a product market to be influenced by the introduction of regulations and price changes. Regulatory bodies can control the entry of firms into the market by adopting certain operating standards. For example, pharmaceutical companies face a large list of regulations governing the development, production, and sale of medicines.