Perfect competition

What is perfect competition?

Perfect competition is called a commercial market where no company has the power to determine the prices of products, since no bidder or demander can, individually, determine the value of a good or service.

Within perfect competition, the factors that determine the price of the product are supply and demand, which allows greater efficiency in the allocation of resources.

The individual consumers must also accept the price so that a perfect competition takes place and a balance is reached between the quantity supplied and the demand for the product. Thus, this system will be suitable for some markets but not for all.

Below is a graph of perfect competition for companies, where demand remains stable as long as said company adjusts to the market price.

Demand graph in perfect competition.

Characteristics of perfect competition

The highlights of perfect competition are as follows:

• So much consumers and businesses must accept the imposed price.
• The companies sell a very small part of the production total of your product.
• Products under this category are characterized for being identical or having many similar characteristics.
• Since no company can alter its price, it is guarantees a single price on the market.
• It both facilitates the access of any company to the industry as your exit to stop producing, if you did not make a profit.
• It is the most transparent market of all since those involved, be they buyers, sellers or consumers, have full knowledge of how the market operates.

Examples of perfect competition

This model is a theoretical exercise, therefore it is difficult to achieve it in reality. However, there are markets that resemble to the concept of perfect competition:

• Bread making: there are many types of bread that are similar in all bakeries. In addition, in general, there are several cafeterias or bakeries very close to each other, so it is very common for the price of bread is the same in all bakeries in the sector.
• Farming: this sector is the closest to perfect competition, since it has a wide variety of vendors selling identical products at the same cost.
• Free software: works in much the same way as agricultural markets since can enter or exit the market at will and his cost is determined by market conditions, not by sellers.