What are the features of a perfect competition market?

Answer 1

The perfectly competitive market is an economic anomaly; it does not exist in real life, because of the unreal circumstances that need to occur in perfectly competitive industries. Perfectly competitive markets have so many competing firms, that one firm cannot change the overall market price of the good that the firm is selling. In a perfectly competitive market, there is perfect economic efficiency for each firm. Each firm's demand curves are perfectly elastic (vertical), although the industry's D curve is not. Another characteristic is that the firms MR curve is equivalent to product price is equivalent to the demand curve is equal to total revenue. These are not all of the characteristics of perfect competition, but these are the basic defining features of this market type.

A picture of a perfect competitor's cost curves: http://ourtwocents.files.wordpress.com/2008/04/perfect-competition.png

Second answer

Note: it is important to bear in mind that perfect competition is not a real thing. It is an idealised model which is analysed in economics the way perfectly elastic collisions, point masses, incompressible materials, perfect vacuums, perfect insulators, perfect conductors, massless inextensible strings, Newtonian fluids, and volumes with no gravitational field in them are used in physics. It is an idealised baseline from which real phenomena are expected to deviate because of their idiosyncratic features. Also, it is not the only such model: other ideals include perfectly price-discriminating monopoly, market-segmenting monopoly, non-price discriminating monopoly, bilateral monopoly, natural monopoly, oligopoly, market-leader oligopoly, monopolistic competition, commons, club goods, pure public goods....

The characteristics of perfect competition are that:

• There is a large number of firms, so many that the demand function facing an individual firm is effectively perfectly elastic
• The firms produce a uniform, homogenous product
• There is a large number of consumers, none of which exercises market power nor prefers one firms' product over any others'
• The consumers and firms are fully and costlessly informed of all prices, and know the quality and properties of the product.
• The firms cannot or do not collude
• The consumers cannot or do not collude
• There are zero transaction costs
• All firms have the same cost function
• All firms are run by entrepreneurs who seek to maximise their profit after paying or imputing costs to factors at uniform market prices
• There are no barriers to entry or exit from the industry
• All factors of production are completely mobile in the long run
• Short-run and long-run economies of scale are limited in such a way that the firms' short-run and long-run average cost curves are U-shaped.