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Perfect Competition: Definition, Characteristics & Examples

Chapter 3 /  Lesson 63   Transcript
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Lesson Transcript
Instructor: Brianna Whiting
This lesson will outline some key factors that help determine if a perfect competition has been met. Examples will be given to help explain perfect competition in real-life scenarios.

Perfect Competition Defined

Imagine yourself as a street food vendor, selling tacos topped with fried onions, ground meat, cheese, fresh tomatoes and dollops of guacamole and spicy sauce in the main plaza of a town close to the border of Mexico. There are three other taco vendors on the other corners of the plaza selling the exact same thing of the same quality. None of the other vendors (nor you) can change the price, because everyone knows that the deal is 3 tacos for $5. Anyone else who wants to sell tacos on the street can do so, and if you want to quit and sell something else one day (or sell your tacos at one of the many other public spaces in your town), no one is stopping you. A business expert might describe this as perfect competition (or a perfect market or pure competition), which means an equal level for all firms involved in the industry. But what does that really mean?

Characteristics of Perfect Competition

In order to attain perfect competition, several factors need to be met. The following list outlines some of the main factors:

  1. Knowledge is available to all buyers and sellers, and no individual has control over the prices.
  2. Buyers and sellers have no barriers to enter or leave the market.
  3. Buyers and sellers want to maximize profit.
  4. There are too many sellers and buyers to take control of the market.
  5. All goods are homogeneous.
  6. The government does not get involved.
  7. There are no costs associated with transportation.

Benefits of Perfect Competition

Now that the factors have been introduced, you might be asking, what are the benefits to a perfect market? Let's look at some of the benefits in more detail:

  1. All of the knowledge, such as price and information pertaining to the goods, is equally dispersed among all buyers and sellers. In other words, there are no secrets, and communication about the products is shared evenly, preventing corruption.
  2. Since there are no barriers to enter the market, this makes it impossible for a monopoly to occur.
  3. Advertisement is not needed in a perfect competition because all goods are the same, and customers have all the knowledge pertaining to those goods.

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