Title: Perfect Competition | Definition | Characteristics | Example
Headings: Perfect Competition
Perfect Competition
Characteristics of Perfect Competition
Price-taking
Homogeneous Product
Barriers to Entry or Exit
Examples
Example 1
Example 2

Content: Homogeneous Product
Second most important determinant of perfect competition is the nature of the product. Perfect competition occurs only where the product traded in the market is homogenous i.e. it is standardized such that a buyer can’t tell the difference between the products of Firm A and Firm B. This assumption is important because due to standardized nature of the product, units produced by Firm A and Firm B are perfect substitutes. If there is a difference between quality or even perception of a difference, consumers might be willing to pay a premium to the firm whose quality they consider to be superior. If a perfectly-competitive market introduces differentiated products, it is more like a monopolistic competition. Barriers to Entry or Exit
The third critical assumption in perfect competition is that the existing firms can’t stop any new firms from entering the market or existing firms from leaving the market. It means that there are no patents, copyrights or other legal hurdles or even economic hurdles such as economies of scale, increasing returns to scale, etc. This assumption is important because it ensures that no firm earns positive economic profit in the long-run. If the market is profitable in the short-run, new firms will enter the market, and this would return the market to zero economic profit. Similarly, if existing firms are incurring loses, some of them will exit the market and the remaining firms would start earning zero economic profit. Examples
Example 1
Let’s consider Bugda Farms, one of the 250 equal-sized farms in Agraria who are engaged in cultivation of wheat.